In a housing or real estate bubble, home prices inflate because of overly optimistic speculation that they'll keep rising. When people can't afford to keep up, the bubble bursts. Demand for homes decreases, while supply goes up and home prices drastically drop.
Today, certain markets across America are seeing home prices go up so quickly that people are starting to worry about another bubble. So where do we stand?
From 2000 to 2006, home prices were skyrocketing. Why? It was fueled by overly-optimistic speculation on real estate, careless lending standards and very low mortgage rates. At the height of the bubble, homes were overvalued by 39%.
Built on that shaky foundation, when prices cooled millions of people defaulted on their mortgages and the bubble didn’t just burst, it exploded, creating the biggest real estate and credit crisis in modern history.
Fast-forward to the present day, and we’re still in recovery mode. With tighter lending standards it’s harder to buy a home, but in the past two years certain markets have seen prices rise rapidly again, leading some to wonder if history will soon repeat itself.
One area that’s heating up is California — the most overvalued market in the nation. Prices there have increased about 17% year-over-year, with Orange County being the hottest metro area. The increases in California are more generally due in part to investors taking up the tight supply and tech millionaires willing to pay premium prices. The other overvalued metros, like Honolulu, Austin and Miami, are also dealing with high demand and tight supply.
Also see: 5 Millionaire Myths
On a national level, home prices are still 5% undervalued. Of the 100 markets monitored by Trulia, 19 are overvalued. However, during the last bubble, in 2006, all 100 were overvalued.
Now, if prices continue to increase at this rate, we should be worried. But that’s not happening, as price gains are slowing down again.
How could that be when homes are selling for tens of millions in areas like New York City and San Francisco?
Believe it or not, there is enough demand in those markets from people who can afford to pay those sky-high prices. Expensive does not always indicate a bubble.
Also see: 3 Harmful Money Lies We Tell Ourselves
Another reason why we’re most likely not headed toward a bubble? Consumer protection is stronger than ever, and strict lending standards have been put in place so that consumers are not over-borrowing like they were last time.
We’re nowhere near previous bubble levels, but it is a good idea to keep a pulse on your region because bubbles inevitably pop up from time to time. So are you paying attention to how quickly home prices are going up or down in your neighborhood?
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- Banking & Budgeting
- real estate bubble