If you’re were burned in the Housing Crisis of 2008, then hearing the term “Real Estate Bubble” probably (and understandably) doesn’t bring back very fond memories. So we get it if you’d rather just put those days behind you. But, knowing and understanding the signs of a real estate bubble can help you protect yourself from getting hurt by one again. So our question today is: What creates a real estate bubble and are we experiencing one now?
There’s no denying the causes of a housing bubble are very complex. There are a lot of factors that contribute to creating a real estate bubble. For our purposes, we’re going to focus on a few major factors:
Low inventory on the market drives up prices. Simple supply and demand - as the demand for housing increases, and the supply of housing goes down, the price of housing goes up.
Speculative behavior by home buyers and property investors. People buy properties with exaggerated expectations of future growth and home price appreciation estimates. The housing market experienced a “rush” from investors looking to capitalize on available properties because they believed they could later sell for much more. However, when the market took a turn, many panicked and sold for much less affecting the market.
Lack of financial literacy and excessive risk-taking by mortgage borrowers. Prior to the housing bubble burst, people were using faulty mortgage products to borrow large loan amounts to buy homes, only to find that later, when the market turned, the home they bought was worth less than the loan amount they borrowed. This creates lots of problems.
The positive news is in the decade since the housing bubble crisis, we’ve gotten smarter about the way we lend money to buy homes. For this reason, we don’t believe we are in housing bubble right now, or expect to be in one anytime soon. Here’s why:
New, conservative lending standards prevent buyers from getting in over their heads. The government has imposed stricter regulations on how borrowers can borrow money. This helps prevent us from making the same mistakes that were made during the housing crisis.
We are still experiencing a correction in normal real estate cycle. More and more homeowners are recovering from a negative equity situation and learning that they are able to sell their homes and either move up to their dream home or downsize to a property that will better suit their needs. Look for these homes to come to market soon!
The best way to protect yourself from getting burned in a real estate bubble is through education and knowledge. Having a true understanding of the real estate market, its trends and its history is vital when making such an important decision like buying or selling a home. The BHURDinUtah agents are not only knowledgable, but make it a priority to stay up-to-date on all things real estate. Reach out to us if you have questions about the market, so you can feel confident you're making a great investment.