You would think that ten years after the bubble’s burst in 2008, that we would have come to some general agreement on what caused it and how to prevent another one.
But nope, there is still no general agreement. People are still arguing after all these years trying to figure out an explanation. We can begin figuring out an answer to this phenomena by first understanding what a housing bubble really is? What is the difference between a housing bubble and inflation? And how do these two affect US real estate?
They say it’s a BUBBLE…
First of all what are the characteristics of being in a housing bubble? Well, usually what you get is some sort of accumulation phase in which people start to say “WOW real estate is expensive and maybe I should hold off or maybe I should wait for it to go down”. And it doesn’t, it just keeps going up! A housing bubble is caused by unexplained risks in the housing market that leads to a rapid increase in real estate prices. The end to this downturn that we call a BUBBLE is unpredictable. the economy changes in a blink of an eye. this is bad for real estate investors who cant tell what the future of our economy is. US real estate is greatly affected when a housing bubble occurs. Home prices began to fall gradually and median home values of existing single-family homes decreased. Real estate investors who bought during the housing bubble were forced to sell their property for much less than its actual worth. It’s not predictable when the next housing bubble will come or how long it would last so investors who are thinking of buying property during a housing bubble must first know and understand the signs that point to a real estate bubble.
1. Home prices are rising faster than salaries
When home prices are increasing and your monthly income isn’t, there is a problem. You have to make a decision. Should you continue to rent or buy a house that you can’t afford? Of course if you feel that the US real estate market is under a bubble you would want to wait to buy. Rapid run-up in prices that don’t match wage growth is definitely a sign for a housing bubble.
2. The slowing of foreign demand
When foreign national buyer demand slows the market suffers. This is especially bad news for international cities like Miami who depend on tourism and buyer demand to stabilize their housing market.
3. Interest rates increase
If real estate investors are in doubt of buying a home, the fact that interest rates are really low should be a clear signal for them to go ahead and make the purchase. Demand for housing begins to fall when interest rates rise. This is a sign of a housing bubble. When interest rates increase houses become unaffordable.
So now that we have the housing bubble covered lets go back to the question presented at the beginning of the article, what is the difference between a housing bubble and inflation? What is inflation? And how does it affect the US real estate market?
One thing that we all know about our economic life is that the prices of things keeps rising. In an economy where there is a major growth in the amount of money inflation occurs. When prices increase and the value of money decreases, you have inflation. So how does inflation affect house prices? Well, as the price and demand concept is used in real estate the inflation means that the demand is higher for the house. This means that there are more buyers looking to buy than there is to sell. So as the houses are sold and there are fewer houses on the market for sale, that is inflation of the houses. This means that houses will sell for a higher price. As the higher price goes up, there will be fewer and fewer houses that buyer will qualify for.
What causes inflation?
1. Demand-pull inflation
this type of inflation occurs when cumulative demand for goods and services in an economy increases more rapidly than an economy’s productive capacity. demand for goods and services will increase when there is a rise of the money in the economy.
2. Cost-push inflation
Rapid wage increases or increase in raw material prices are common causes of this type of inflation. The rise in the price of imported oil during the 1970s is an example of cost-push inflation.
3. Monetary inflation
Which is caused by the expansion in money supply due to the printing of more money by a government to cover its deficits. Too much supply of money makes its value go down causing the price of everything else to go UP!