Are You In A Housing Bubble? What You Need to Know
A housing bubble can be a confusing situation for a person who does not understand the real estate market. Homeowners who know what a housing bubble is, how to identify a bubble when it happens and how to protect their assets can fare better during a bubble than homeowners who don't.
What Is A Housing Bubble?
A housing bubble is a market condition that happens when housing prices increase such that a significant portion of the population can no longer afford to buy a home. Usually a bubble grows sharply, often in a time of a good economy when most people have more disposable income. A housing bubble often happens for many reasons, including overzealous investor activity and a high demand among residents of a particular area or city. During a housing bubble, competition between buyers for a limited supply of homes will unnaturally inflate the cost of Westchester new homes in the area until the bubble "bursts," meaning that the market experiences a sharp and sudden decline in prices.
How Can You Tell If You're In A Bubble?
It's hard to tell in the moment when a bubble exists. Often, home buyers aren't aware that a bubble exists until it ends. Paradoxically, if the crash never happens, then a bubble never existed. When experts are looking at the housing market to determine whether or not a bubble exists, they'll consider a variety of factors, but the most crucial question to answer is, "is the area affordable" and if not, then why?
Some markets are just in-demand markets. This is especially common in urban areas where salaries tend to be high and jobs are plentiful. A sharp rise in housing costs does not have to signify a bubble, provided that the average resident can afford to buy a home.
Other factors to consider when trying to decide if an area is in a housing bubble include:
- Mortgage payments are outstripping paychecks.
- It's easy to get a mortgage loan and often the loan terms are relaxed.
- Interest rates are low or there are more ARM type mortgages.
- Many types of mortgages are heavily leveraged (i.e., the home is purchased with a small down payment and a large loan from the bank).
What Should You Do If You're In A Housing Bubble?
Selling a home at the peak before a market crash might make economic sense. Selling any asset, including homes, at the top of a market cycle can make the person a great deal of money. Of course, not all homeowners have the luxury of selling their home because they may be concerned about market conditions. And selling a home is a risk in and of itself. After all, there's no guarantee that a bubble exists until it pops.
Homeowners who may not want, or cannot currently, sell their homes, might consider the following to protect themselves from a possible housing market crash in the future:
- Pay for home improvements in cash, avoid taking out more home improvement loans.
- Build up a hefty "rainy day" savings.
- Avoid going heavily into debt or using credit cards in excess.
- Diversify investment portfolios.
- Work with a financial planner to make smart investment choices.
Essentially, the more debt that a homeowner has, the higher risk they are for a mortgage default, especially in the event of an economic downturn. Playing it financially safe is the best way for a homeowner to ensure that their investments will be protected.