- With home prices continuing to rise, many Americans are wondering if we are see the formation of a housing bubble.
- While bubbles are a natural part of the economic cycle they’re not all created equal.
- There are key differences between today’s market and the market preceding the 2008 housing crisis.
- While the Great Recession was cause by fraud and poor lending standards, today’s market is defined by an excess of cash
The question of whether or not the housing market is an inflating bubble is one that tends to come up quite frequently when prices see a significant increase or the amount of transactions increase to a substantial level. It’s no wonder, then, why the current state of the real estate market, especially in North Texas, would spark questions, and even fears about whether or not we’re currently experiencing the effects of an inflating bubble. Today, we’re going to explore the intricacies of housing bubbles and lend some insight as to what the future may hold for the market.
What is a Real Estate Bubble?
A real estate bubble is an economic phenomenon characterized by rapid increases in property prices followed by sharp declines. It is often associated with periods of economic instability or recession.
Bubbles form when investors purchase assets, such as property, at prices that are higher than the assets’ true value. This creates demand for the asset, driving prices even higher. At some point, investors become overeager and prices become unsustainable, leading to a sell-off. The bubble bursts and prices fall dramatically, often below the level at which they began.
The real estate bubble of the 2000s is one of the most infamous examples. Prices peaked in 2006 before crashing the following year. The bubble’s collapse was a major contributor to the global financial crisis.
Are All Real Estate bubbles bad?
While real estate bubbles can be damaging, they also have positive effects. They can create new opportunities for investment and growth, and they often lead to more efficient markets. It is important to distinguish between real estate bubbles and normal fluctuations in prices, which are a natural part of a healthy market.
Some economists have argued that real estate bubbles are a necessary part of economic growth. They point to the fact that periods of rapid economic expansion are often accompanied by housing booms. This was the case in the United States in the 1920s, 1960s, and 1990s. While these expansions eventually ended in recession, they were followed by periods of strong economic growth.
Others have argued that real estate bubbles are harmful and should be avoided. They point to the fact that bubbles often lead to economic downturns, as was the case in the 2000s. They also argue that bubbles create economic inequality, as only those who own property at the right time reap the rewards.
It is still not clear which argument is correct. The jury is still out on the real estate bubble.
Are We Currently In A Bubble?
Now that we’ve answered the question of what a real estate bubble is, it’s time to turn our attention to the current market. Are we in a bubble?
There are a number of factors to consider when trying to answer this question. One is the state of the economy. Another is how long prices have been rising. And finally, we need to look at whether or not there is an oversupply of properties on the market.
The first factor to consider is the state of the economy. The U.S. economy is currently in a period of expansion, with low unemployment and strong economic growth. This is generally seen as a positive sign for the housing market.
However, there are some experts who believe that the current economic expansion is built on unstable foundations. They point to the fact that many Americans are still struggling financially, and that the stock market is overdue for a correction. They believe that a recession could be just around the corner, which would have a negative effect on the housing market.
The second factor to consider is how long prices have been rising. Home prices in North Texas have been increasing steadily for the past few years. This is normal during periods of economic expansion. However, if prices were to rise too quickly, it could be a sign of a bubble.
There is certainly concern, based on the rapid increases in home value since 2020, that housing in North Texas is overvalued, however that only tells part of the story. The most important thing to consider when assessing whether or not we’re in a housing bubble is the cause behind the rapid price increase.
Let’s take a look at the 2008 housing market crash. The contributing factors that led to the burst of the housing bubble causing the great recession were low standards for financing approval, Wall Street corruption, over-leveraging, and mortgage fraud.
Essentially, mortgage companies lended money to buyers while requiring little to no documentation, advertising adjustable rate mortgages with large increases in interest rates after a certain time period, or even encouraged buyer to lie on loan applications.
After the loans were completed, they were sold to large investment banks and other institutional investors in the form of mortgage backed securities. While these loans were shaky from the start, they were given AAA ratings by Wall Street agencies as a result of pressure by the firms that created the securities. As the economy slowed and home buyers could no longer afford the homes they had purchased with mortgages they couldn’t afford, the whole market came crashing down.
This is a much different scenario than what we’re seeing in the market today. Prices increases, especially in areas such as North Texas, are being driven by two primary factors: homebuyers relocating to the area after selling their homes in traditionally expensive markets, and labor and material shortages causing extensive delays in new home construction.
Put simply, a lot of people are relocating to areas where builders can’t keep up with demand and are still recovering from the logistical issues caused by the pandemic. What’s more telling is that most home sales in North Texas that occur over the asking price of the home involve buyers bringing extra cash to the table. This is a key difference as buyer must have that cash in hand in order to close, rather than taking on more debt in the form of a mortgage.
Taking these points into consideration, it doesn’t appear that the market is currently experiencing a bubble-like scenario, though it’s obvious that a shift is on the horizon. The most likely outcome is that, as buyers continue to push prices higher, a tipping point is reached in which prices swiftly level out. As this happens, we will likely see prices return to the national average of around 5% appreciation annually and stay there for a number of years.
There is a lot going on in the market right now and it’s important to be prepared for whatever happens next. Make sure to connect with your local Livian agent if you’re considering buying or selling in this wild market!
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