Building up to a burst: Is the frantic U.S. housing market just a bubble?
House prices keep soaring throughout the United States in a sign of the ongoing phenomenon of a property market where demand continues to outpace supply regardless of the location, but is this long-running buyer’s market actually a swelling bubble that’s about to burst?
Whether literal or figurative, every bubble has a breaking point, and for real estate, this can happen more often than investors would like. Bubbles are caused when demand for properties starts to tick up, which in turn reduces the supply and increases the overall price of homes. This upward swing then encourages even more demand for properties, because people see them as an investment option with quick growth, regardless of whether home prices are inflated.
A hallmark of a housing bubble is that it leads to some properties being overvalued, which gives the owners a false sense of increased wealth, spending more actual money because of the financial security that they think their home – likely their biggest investment – gives them.
But eventually, demand for buying new properties slows down, supplies increase, prices drop and the bubble pops, decreasing the value of homes bought during the peak.
The result of a housing market bubble bursting is that many homeowners can then find themselves underwater, meaning that the total debt they hold for the property including the mortgage is more than the current highest price at which the house could presently sell.
Such an outcome might seem impossible given seemingly daily reports of home prices reaching new record highs across the country, including properties passing the $700,000 threshold in Southern California. And online real estate company Zillow anticipates even more growth in many states until at least the spring, rather than any collapse in the coming weeks.
But closer scrutiny of the latest statistics offers some concerning signals about developments that might not mean a bubble burst is imminent, but the bubble is still being inflated.
In the Minneapolis-St. Paul area, recently released data show that even though property prices remain high, demand appears to be receding. The area recorded a drop of more than 7 percent in homes sold in February compared to the same month last year. The same story is playing out in other regions, with some experts predicting Texas’ real estate is on track for a market slowdown. If these trends continue elsewhere, there might be a bubble on the horizon.
Predicting the future is impossible without a time-traveling DeLorean and a sports almanac, so no one can say whether the current U.S. housing market is definitely a bubble that’s ready to burst. However, savvy or cautious investors would be wise to start looking at the seemingly never-ending spike in property demand and prices with a more skeptical eye.
Proactive investors might want to consider taking steps now to explore refinancing their mortgages to guarantee that they’ll still be able to make their monthly home loan payments if the market is indeed experiencing a bubble that is getting more fragile by the day.
Reviewing real estate strategies and potentially stepping back from riskier and bigger budget purchases could be one way for an investor to ensure that if the housing market is a bubble on course to implode, the net impact on their financial portfolio won’t be catastrophic.
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