What is a Housing Bubble? Is One Forming Now?

What is a Housing Bubble? Is One Forming Now?

Identifying a Price Bubble

The worst part about bubbles is that they eventually pop, and, in 2008, the housing market did just that. 

This recession had a lot to with the concept of a "price bubble." According to Dr. Jack M. Guttentag, Professor Emeritus at the Wharton School of the University of Pennsylvania: 

A price bubble is a rise in price based on the expectation that the price will rise. Sooner or later something happens to erode confidence in continued price increases, at which point the bubble bursts and prices drop. What makes it a price bubble is that the cause of the price increase is an expectation that the price will increase, which sooner or later must reverse itself.

Essentially, a price bubble is the result of a bad (even if educated) guess. Prices increase artificially in order to match their expected trajectories, but these increases finally reach a point of no return. This causes prices to drop quickly, switching back to lower values.

Are We Heading Towards a Price Bubble? 

The short answer: No. 

The Guttentag answer: 

My view is that we are a long way from another house price bubble. Home buyers, lenders, investors and regulators now understand that a nationwide decline in house prices is possible -- because we recently lived through one.”

Why so confident? 

While home values continue to bloom and appreciate in value, the pace of this growth is hardly manic. In fact, a slower, more sustainable growth pattern continues to emerge with the passage of time.

This graph demonstrates 2015's stable growth:

What is a Housing Bubble? Is One Forming Now? Though the growth rate of home values dropped from 10.8% to 5% between April 2014 and 2015, it is actually a symbol of economic health. Instead of values jumping and plummeting, small growth indicates that values are already high and continue to increase. 2014's data indicates a housing market in recovery - the 10.8% a subsidiary of a smaller value.

These numbers indicate that the market will work in favor of buyers and sellers alike. By locking in the currently low interest rates, buyers can secure great mortgages and begin accruing wealth, while sellers can take advantage of high property values. When you're ready to begin your involvement in the real estate market, drop the Real Group Team a line! Our team of experts would love to help you find home!

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