Homeowners are concerned that another crashing economy will result in an underwater mortgage<\/a> or worse, cost them excessive home equity and make it impossible to sell at a profit.<\/p>\n But how can you tell if the housing market is in a bubble that\u2019s ready to pop?<\/p>\n Knowledge is power\u2014and the only way to separate fact from fiction. So let\u2019s take a look at the answers to the top questions home sellers have about housing market bubbles.<\/p>\n Simply put, a housing bubble<\/a> describes the real estate market condition when home prices rise above average at a rapid rate\u2014fueled by high demand and low inventory.<\/p>\n \u201cA housing market bubble is where housing prices have exceeded what can be sustained by the market,\u201d explains Florida real estate agent Brett Keyser<\/a>, who ranks in the top 1% of all active real estate agents in Sarasota<\/a> and Manatee County<\/a> in total number of sales.<\/p>\n \u201cIt’s unsustainable because the house prices get so high that nobody can afford them. That’s where a bubble is, in this big disparity between what buyers are able to pay and the price sellers are willing to sell at. If that’s such a big difference, then you have a pop and prices come tumbling down. Otherwise it would be called a market correction.\u201d<\/p><\/blockquote>\n This fast and excessive increase in home values often occurs artificially because of speculation<\/a>. Investors, fueled by rising home prices, begin snapping up properties at an accelerated rate, causing inventory to shrink unnaturally and prices to rise higher and faster than ever.<\/p>\n As home prices rise, more and more potential home buyers get priced out of the market. With fewer people able to afford homes, demand drops\u2014and so do prices. That\u2019s when the housing bubble bursts.<\/p>\n To really understand why this happens, look to the economic principle of supply and demand<\/a>\u2014a top factor that determines home values.<\/p>\n In real estate, inventory refers to the months of supply<\/a> or how many months it would take the number of listed homes to sell. For example, if there are 600 homes available for sale in your market, and 100 sell every month, then there\u2019s a six-month supply of inventory.<\/p>\n Anything under six months is considered low inventory.<\/p>\n Demand is all about the number of home buyers actively looking to purchase a home. Factors that drive demand up include low unemployment, low mortgage interest rates, and high rents (making homeownership less expensive than renting).<\/p>\n When inventory is low and demand is high, buyers get into bidding wars<\/a> for properties, driving the final sale prices up. Then, when new homes come on the market, they set their asking price at or over those inflated sold prices.<\/p>\n Unfortunately, it\u2019s not that simple. It takes a lot longer to build a house than it does for a homeowner to decide to sell. Because of this, home builders are essentially in the game of speculation, anticipating what buyer demand will be when their homes are completed and ready to sell.<\/p>\n \u201cHome builders don’t want to flood the market with too much inventory because if they do, they’re going to lose out,\u201d says Keyser. \u201cThey’re gonna have all of this inventory on the books and they’re going to have to slash their prices.\u201d<\/p>\n Determining whether or not we\u2019re in a housing bubble isn\u2019t as simple as looking at a chart tracking home values\u2014because rising home prices don\u2019t automatically mean we\u2019re in a housing bubble.<\/p>\n Home prices rise naturally apace with a growing economy. That\u2019s why real estate is considered as a solid, low risk investment<\/a>\u2014because land is an appreciating asset<\/a>.<\/p>\n And when home prices level off or even dip slightly, that doesn\u2019t mean we\u2019re automatically facing a housing market crash. So, even though home prices have been steadily rising since the housing market crash in 2008, that doesn\u2019t mean we\u2019re heading for another one.<\/p>\n \u201cI do not see a bubble forming although there are several overvalued housing markets in the U.S.,\u201d says Matthew Gardner<\/a>, Former Chief Economist with Windermere Real Estate.<\/p>\n \u201cThe principal reason why I am not forecasting a crash per-se is that, unlike the 2008 crash, the increase in housing prices and demand is not being driven by speculators, rather it is being driven by demand form solid economic growth. Additionally, home buyers this time around are remarkably qualified to service their mortgages and are also putting down substantially higher down payments.\u201d<\/p>\n That doesn\u2019t mean that another crash isn\u2019t possible. The real estate cycle<\/a> fluctuates naturally between buyer’s, seller’s, and balanced<\/a> market conditions\u2014which means home values fluctuate, too.<\/p>\n When home prices sink, there\u2019s always a chance that your home\u2019s value could decrease until it\u2019s less than you owe on your mortgage.<\/p>\n \u201cTheoretically, it could be possible for owners to owe more on their homes than they are worth,\u201d explains Gardner. \u201cThis acts as a disincentive to continue to pay their mortgages and we would see a significant rise in foreclosures.\u201d<\/p>\n So there is a chance that we\u2019ll see downturns in the real estate market in the future, due to rising interest rates and reduced demand\u2014and perhaps even a dip significant enough to result in upside-down mortgages and foreclosures.<\/p>\n However, we probably won’t see a housing market crash<\/a> as severe as the one in 2008.<\/p>\n The 2008 financial crisis was so complex that dozens of books<\/a> have been written to explain what went wrong. While there\u2019s no need to dig deep into all the nuances of that economic calamity, understanding the role the real estate market played will ease any worries about it happening again.<\/p>\n The \u201cperfect storm\u201d that resulted in the housing market crisis had a number of<\/p>\n contributing factors<\/a>, such as loans that required a 3.5% down payment or less, and the granting of too many adjustable-rate mortgages.<\/p>\n But the biggest factor was this: Mortgage lenders gave those low down payment, adjustable-rate mortgages to high-risk buyers who didn\u2019t have the documentation to prove their economic stability and ability to pay that mortgage back.<\/p>\n \u201cThe mortgage community was not regulated and they were allowed to get away with giving no documentation loans. Any Joe could say he was making half a million dollars to get a loan to buy five houses, but it wasn’t verified,\u201d explains Keyser. \u201cSo flippers and investors artificially drove up prices, which eventually reduced demand. Then those investors couldn\u2019t sell at a profit or afford their mortgages, so everything had to come crashing down.\u201d<\/p>\n To make matters worse, many of those no-doc loans got bundled up and sold on the stock market as secure products\u2014but they weren’t. Where investors thought they were buying into an appreciating asset, they were actually buying up bad debt.<\/p>\n The increasing demand for these mortgage-backed securities<\/a> on Wall Street led banks to grant more and more no-doc loans to high risk, financially unstable buyers. When the housing market took a downturn and home prices began to dip in 2007, all of those homeowners with high-risk mortgages began to default on their loans, which led to mortgage companies filing for bankruptcy\u2014which led to the subprime mortgage crisis<\/a>.<\/p>\n In order to prevent the economy from collapsing completely, the government stepped in to bailout the banks with the creation of the Fannie Mae and Freddie Mac Conservatorships<\/a>. This need for government intervention led to massive economic reforms.<\/p>\n \u201cAfter the financial crisis of 2008, the Dodd-Frank Act<\/a> and a lot of other financial reform laws went into effect that essentially said, \u2018We\u2019re not going to have this happen again.\u2019 We\u2019re not going to allow these no-doc loans,\u201d says Keyser. \u201cNow it\u2019s so secure, they practically want to get your blood type now before you\u2019re actually going to get a loan.\u201d<\/p>\n We know what did happen when the housing bubble burst in 2008\u2014home prices sank so low so fast that people were paying off mortgages on houses now valued at half or less than they paid for the property.<\/p>\n This led to homeowners defaulting on their loans and losing their homes to foreclosure, which eventually contributed to mortgage companies collapsing.<\/p>\n \u201cThe housing bubble can only burst when there\u2019s so much disparity between existing home prices and affordability,\u201d says Keyser. \u201cWe\u2019re talking huge numbers here, so that even a $10,000 or $50,000 price reduction on the house isn\u2019t going to make a difference.\u201d<\/p>\n Given the financial reforms, the chances of another catastrophic housing bubble burst are slim, and even the experts admit that it\u2019s difficult to spot a housing bubble<\/a> until it pops.<\/p>\n However, there are signs to help you spot a downturn<\/a> in real estate. When interest rates rise, months of supply rates rise, and demand begins to wane, savvy homeowners and soon-to-be sellers know that the current seller\u2019s market is rife for shifting to a balanced or buyer\u2019s market.<\/p>\n And when the housing market shifts, your financial planning and home sale strategies need to shift, too.<\/p>\n![\"Sold](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2018\/12\/housing-market-bubble-sold.jpg\")
<\/a>What is a housing market bubble?<\/h3>\n
What causes a real estate bubble?<\/h3>\n
If low inventory is the issue, can\u2019t building more houses help lower prices and keep the bubble from bursting?<\/h4>\n
If home prices are on the rise for a long time, does that mean we\u2019re in a bubble?<\/h4>\n
![\"Graph](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2018\/12\/image1.jpg\")
<\/a>![\"Newspaper](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2018\/12\/crash-housing-market-bubble.jpg\")
<\/a>What did a housing market bubble have to do with the market crash in 2008?<\/h3>\n
![\"Infographic](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2018\/12\/recession-housing-market-bubble.jpg\")
<\/a>![\"Graph](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2018\/12\/fred-housing-market-bubble-775x341.png\")
<\/a>What happens when the bubble bursts?<\/h3>\n
![\"\"](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2018\/12\/housing-market-bubble-notes.jpg\")
<\/a>What should homeowners and sellers do if a bubble is looming?<\/h3>\n