Housing Bubble - Frequently Asked Questions

What Is A Housing Bubble?

A housing bubble is a situation that is often never recognized until it's too late. When property values increase too quickly, and reach a level that is not in line with income affordability as well as a few other economic factors, there is a 'correction' in the housing market. That correction usually means home prices will fall. Falling house values can leave many homeowners with mortgages larger than the value of the property. (A housing bubble can occur in a local as well as the global real estate markets.)

What Causes A Housing Bubble?

This may sound like a simple question, but the answer can be quite complex. There can be a number of contributing factors.

Historically low interest rates, lax subprime mortgage lending standards, and a speculative frenzy have contributed to housing bubbles. The fluctuations in the stock market have also affected the real estate market.

What Is A Subprime Mortgage Crisis?

The subprime mortgage crisis of 2007 has resulted in a credit crunch of massive proportions.

As the large number of subprime mortgages with low introductory rates revert to regular interest rates, homeowners are unable to make their payments. The banks and other lending institutions who lowered their requirements for borrowers to qualify for a mortgage earlier, now have to turn to mortgage foreclosure to recover even some of their money. The mortgage foreclosure situation has caused a problem for even those with good credit whose homes are losing value at "double digit rates".

When Did This Housing Bubble Start To Deflate?

The bursting of the latest housing bubble appears to have started around late 2005 or early 2006, with the following signs: fewer homes sold, a rising inventory or homes for sale, falling median prices, and an increase in mortgage foreclosures.

"The great housing bubble has finally started to deflate ... In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials." ~ Fortune Magazine Report, May 2006.

How Does A Housing Bubble Affect Me?

Not only are consumer home values impacted by a housing bubble burst, but all the related industries including home builders, the mortgage markets (banks as well as private lenders), home supply retail stores and the stock market.

Conclusion

Inspite of the obvious problems in many real estate markets nationally, several economists still doubt there will be any significant decline in house prices. They use the compiled data since the 1929 Great Depression to today, and cite healthy employment along with an increasing demand from Baby Boomers. That may be little comfort to those who are presently unemployed, trampled with credit card debt and facing mortgage foreclosure.

Home ownership is still preferable to renting, especially when the home ownership term is expected to be at least five years. However a 2007 Forbes article titled "Don't Buy That House" concludes that for now, "resist the pressure [to buy]. There may be no place like home, but there's no reason you can't rent it."

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