Housing bubble

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A housing bubble, or a real estate bubble, periodically occurs in local or global real estate markets and is characterized by rapid increases in property valuations and reach unsustainable levels in relation to incomes and other economic elements.

A bubble is something where the prices are being regulated by speculators and not the real end consumers. If it is being fuelled by the real consumers then it can be called a pure play of demand and supply.

Contents

Why should I be aware of this?

The most affected are those who made their purchase at what appeared to be the top of the housing bubble. As mortgages readjust while the underlying value of their properties decline, these buyers face extreme difficulties. Those who have bought their houses much earlier do not pay as much of their income for housing costs, and can continue to live in their home, as long as they did not refinance it using a new mortgage product.

On account of the low interest rates over the past few years, many people have fallen for finance companies' push for "consolidation" of all their credit card debt by paying off those debts with a home equity loan. A single home equity loan consolidates all high interest loans into one.

All about housing bubble

In recent times when housing prices rose to all-time highs, many people took out adjustable rate mortgages (ARM) which offer low initial interest rates. This made it possible for them to afford the homes they wanted. After a few years when interest started rising many homeowners began trying to refinance their loans.

But since property prices were not appreciating at the same rate, these people found it difficult or impossible to get their homes refinanced. People found themselves stuck with sharply increasing mortgage payments, going up to as much as double the amount of the initial payment.

As the number of such people stuck with homes grew, the number of homes going in to foreclosure also began to skyrocket. With more and more people losing their homes, the market became flooded with property, and as a result home prices began to decrease even more due to the increasing supply of foreclosure homes on the market.

As home prices continued to decrease, the harder it became for people with ARM loans to get their homes to appraise high enough to refinance out of high payments they could not afford.

Downturn in real estate market

The main reasons for downturn in real estate market are:

Rising property prices

Rise in prices of property not only reduces the number of buyers in the market, but also causes a downfall and obstructs economic growth. On the other hand growth in population increases the demand of houses which is a basic need of shelter of any individual. This results in a fall in demand for houses though there are innumerable numbers of buyers waiting in the market to purchase any property. With rise in interest rates mortgage activity too slows down and people get entangled in the lengthy process of paying installments for years together after purchasing any property.

Inflation

Inflation leads to an increase in most essential goods to the goods of sheer luxury.

Rise in interest rates

The real estate market is always driven by interest rates on loans and mortgages. Hence people always try to buy houses at adjustable loans with adjustable payments. The increase in adjustable rates will further send the consumers in monthly payments hundreds of dollars higher and cause many more for closure homes to enter already saturated market.

Default on payments and bankruptcy

Default in payment of interest takes place as a result of job lay offs and zero level of savings. That is four times the average rate of borrowers who normally default on their loan. This leads to a drastic downfall in the real estate market.

Sub prime loan

Sub prime loans are the loans granted to people whose credit is less than desired. This has turned out to be the major cause of payment defaults, resulting in increased closure rates.

What can I do about it?

Real estate crashes are a reality we cannot escape from. In most cases, real estate sales are final, so it's up to the buyer to know what he or she is purchasing and to review the contract thoroughly before signing. Before purchasing real estate it is necessary to have two kinds of information: knowledge and data, such as industry pricing, value, market values, and contract terms. This will give you necessary confidence to execute real estate deals. Other important information necessary are accurate, reliable property, sales comparables and foreclosure activity related data. Probe deeply to find out if there is any risk associated with that land.

As a real estate crash is likely to happen any time always try and repay the principle of your home loan as promptly as possible. Build as much equity as possible in your home to enjoy the maximum protection in case housing prices stagnate or decline. The fastest way to build equity is paying as much of the principal amount as possible.

Ninty degrees

Who profits from the housing bubble?

Media scaremongers, mortgage insurance providers, and stock brokers, real estate investors are the ones blamed for making money out of the housing bubble. What's that? How do real estate investors make money from the real estate bubble? Is it by taking advantage of desperate home sellers scared by the media?

References:

  • Real Estate Market Crash: How Will It Affect You?
  • Feeling the Effects of a Housing Bust
  • How To Recover From The Housing Bubble