If you read the news or listen to new stories like most other people, you’ve probably heard the term “housing bubble” before. Of course, hearing the term and understanding the term are two different things and knowing that a housing bubble is negative and has to do with real estate prices isn’t the end of the story. 

Here’s a more detailed description:

What It Means

A housing bubble refers to a temporary situation in the housing market, where the price of real estate rises quickly.  This “bubble” is fueled by incorrect real estate speculation, so as it continues to swell there is always the chance of it bursting, which is the real issue. 

A housing bubble that bursts can have a large economic impact and cause ripples in the real estate market for years.  No one ever sets out to create a housing bubble in any market, but sometimes the market kind of takes on a life of its own and things get out of control. 

How It Happens

As the demand for housing in a particular market increases, the prices follow suit and increase, too.  This demand may come from lower than average interest rates, the overall economic situation or some loose credit underwriting practices.  Whatever the reason, the increased demand matches up against a limited supply, which drives prices up higher, and then inevitably the demand decreases. 

When the demand for housing decreases at the same time as the supply increases, the prices will drop quickly, and your housing bubble bursts. 

Hard To Predict

Some experts feel as though a housing bubble is a predictable condition, while others believe there really is no way to figure out if and when it will happen.  One thing is certain, and that is if a housing bubble is predictable, it isn’t easy to predict.  After it is over and the damage is done, any experts will point out the various clues that were present, but not many will recognize them as they happen. 

Some even contend that a housing bubble is a natural and necessary part of a real estate market, and it shouldn’t be prevented even if the signs are there that it is about to happen.  Of course, no one ever wants to lose money or have the value of their home take a nosedive after the fact, but these things do happen from time to time. 

If you are thinking of buying a home, but you’re concerned about how real estate prices have climbed in recent years, give us a call and talk it over before making a final decision.