“Housing bubble” (or “real estate bubble”) is a term you hear a lot these days. It pops up frequently in conversations about the real estate market. And you’re probably aware (at least vaguely) that we had one just a few years – one that burst dramatically. So, like most of us, you’re probably wondering what such a bubble is and where it is happening (if it is). So let’s dig in and see exactly what a housing bubble is and whether there is one happening in Redlands.
What Is a Housing Bubble?
A housing bubble is basically a sharp increase in housing prices. This “run-up in housing prices [is] fueled by demand, speculation, and exuberant spending to the point of collapse.” A bubble usually begins with an increase in demand when there is limited inventory (which takes some time to replenish and increase). Then, speculators often pour money into the market, which drives up demand even more. Eventually, demand decreases or stagnates and supply increases, which results in a dramatic drop in prices – and at this point the bubble bursts.
Although a housing bubble can last for years, it is nevertheless a temporary event. “Usually, it’s driven by something outside the norm such as manipulated demand, speculation, unusually high levels of investment, excess liquidity, deregulated real estate financing market, or extreme forms of mortgage-based derivative products – all of which can cause home prices to become unsustainable. It leads to an increase in demand versus supply.”
What Causes a Bubble?
As we indicated above, a housing bubble is typically caused by a combination of factors that all lead to high demand and steep price increases. A requisite condition for a bubble is a healthy economy so that people feel secure in their jobs and have growing disposable income. These conditions encourage them to shop for homes, with the result that demand increases.
One important factor is mortgage rates. “Low rates drive up demand because mortgages become more affordable. In a real estate market where rates are low and house prices are on the rise, multiple buyers often race each other to nab each new listing. That drives prices up even more.”
A related contributing factor is less rigorous lending requirements. And then there is the fact that real estate tends to become overvalued when investors/speculators enter the market.
When all these factors come into play, you have a housing bubble.
How Does it Affect the Economy?
Real estate and the housing market are important components of our economy. “At the individual level, roughly 65% of occupied housing units are owner-occupied . . . Homes are often a substantial source of household wealth in the U.S., and housing construction provides widespread employment.” So a housing bubble can strongly impact the economy.
“Housing prices can affect residential investment and therefore affect economic growth. Rising home prices can encourage additional construction spending when the prices are high, leading to more robust economic growth. A decline in housing prices is likely to depress construction spending, leading to more anemic economic growth.”
Further, as home values increase, homeowners tend to spend more than they would at other times. The reasons for this economic behavior include “higher confidence in the economy, increased home equity for homeowners to borrow against, and higher rental income.”
To find out exactly how a bubble would affect your market, contact a Redlands agent at (951) 232-9704.
Is Redlands in a Housing Bubble?
Here’s the short answer: Probably, but maybe not.
Some experts don’t believe we are currently experiencing a housing bubble because the price increases can be attributed to different causes than those of the bubble in the early 2000s.
“The housing market crash of 2008 was largely caused by predatory lending. Lenders made loans that borrowers could not afford to repay. In many cases, no documentation was required to prove that the borrower had enough income to afford the mortgage. Virtually anyone could get a home loan. . . . Experts believe new home construction will help ease demand in the near future.”
But other industry watchers believe that Redlands and most other markets are in a housing bubble. Here’s why . . .
They are, they say, seeing abnormal behavior in the US housing market, the first of such behavior since the boom of the early 2000s. The “reasons for concern include the price-to-rent ratio (which compares the economics of buying versus renting), in particular, and the price-to-income ratio (ratio between the price of a median home to that of the median annual household income in a particular area) – which show signs that 2021 house prices appear increasingly out of step with fundamentals. Along with low mortgage rates, other factors that drove up prices include a surge in disposable income because of pandemic-related stimulus and reduced household spending because of mobility restrictions and lockdowns.”
Overall, the consensus lands on the side of there being a housing bubble in Redlands.
What a Redlands Housing Bubble Means for You
Whether you are a buyer or a seller, a housing bubble means that the services of an experienced Redlands agent are more critical than ever. You’ll need your agent’s expertise to get the best price possible at a time when they are rising. And, on the other side of the coin, you’ll need your agent to help you sell fast before the bubble bursts. So if you don’t want to suffer in the Redlands housing bubble, contact us today at (951) 232-9704.