The words "housing bubble" invoke feelings of dread for some people. The 2008 housing crisis meant evictions and foreclosures.
What is a housing bubble? The term is used often. What does it mean, though?
Even if you haven't experienced a housing bubble, it's important to understand them.
In this article, we'll break down the causes and effects of housing bubbles.
What Is a Housing Bubble?
A housing bubble is a period in real estate when home prices become inflated to extreme levels. This could be due to demand, speculation, or over-eager investments.
These market challenges cause homes to skyrocket until they are no longer supported. It boils down to limited supply to meet the demands of the market.
That creates a rapid supply growth that brings home prices crashing down.
What Causes a Housing Bubble?
Many factors lead to a housing bubble. When the economy is robust, people often spend on housing.
Strong economies have strong credit growth people are more apt to take on debt. Low interests spurn fewer lending restrictions that can contribute to housing bubbles.
These economic fluctuations sometimes promote high levels of speculation and risky behavior. That means there may be more investors or unfit homeowners in the market.
Sharp price hikes on homes can result. This makes it harder for people to afford homes they could before.
What Effects Can a Housing Bubble Have?
When a housing bubble pops, it has wide-ranging effects on the economy.
Housing bubbles affect real estate prices. Homes can lose value to the point where people become upside down on their homes. As a result, some people struggle to pay their mortgage.
The steep decline in home prices affects neighborhoods. As foreclosures happen in neighborhoods, home prices plummet further.
Housing bubbles have significant effects on personal wealth. As home prices drop, you lose equity for lending. Many people dip into their savings to pay for everyday bills.
Lending practices become more rigid. This makes it hard for people to buy homes without stellar credit. As you can see, this becomes a cyclical process.
How Can You Protect Yourself From a Housing Bubble?
You can't control real estate supply and demand. But you can control your borrowing. The best way to protect yourself from a housing bubble is to borrow only what you're sure you can afford.
Your home is often your biggest investment. There is no assurance that it will always appreciate. It's important to find an experienced agent to help you in the homebuying process.
Make sure to use a lending company that won't entice you to buy a home you can't afford. Following these guidelines can safeguard you in case of another housing bubble.
The Right Agent Makes a Difference
What is a housing bubble? Now you know! We hope you find this article helpful as you look for your next home.
The right agent and conservative lending are key to avoiding housing bubble woes.
Looking for more great content? Please check out the rest of our blog for more posts about real estate.