That housing market crash resulted from a perfect storm of loose lending practices and poorly-regulated investment bankers selling derivatives that no one else understood.īut when prices increase at a double digit pace for several years like they did from 2020-2022, alarm bells should ring. The odds of a nationwide Great Recession-level housing bubble remain slim. Will they drop 25-30% like they did in the Great Recession? Almost certainly not. That’s a drop of just 1.4%.Ĭould real estate prices drop further? Absolutely. From a peak of $333,452 in August 2022, median home prices dipped to $328,745 by the end of January 2023.īut let’s not dive for our apocalypse bunkers just yet. We’ve already seen nationwide home prices drop since mid-2022. Investors don’t want to touch the area, and homeowners won’t either until prices drop enough for them to feel like they’re “scoring a deal.” Which eventually happens: prices go so low that the neighborhood becomes attractively priced again. If they start defaulting on their loans, a wave of lower-cost foreclosures hit the market, driving prices even lower. Some homeowners end up underwater on their mortgages as prices fall. It happens slowly at first, but once it becomes clear that there’s no demand at current pricing, demand falls even further. Prices stagnate briefly, then when sellers can’t find a buyer, they lower their prices. Once homebuyers and speculators realize it costs more to live in the neighborhood or city than it’s actually worth, demand begins to dry up. It creates a self-fulfilling prophecy, a feedback loop of higher prices fueling more demand with the expectation of further appreciation. Some buyers reach beyond their comfortable budget, aided by low-down-payment loan programs and loose income requirements.Īnd it works - for a little while. When demand starts becoming fueled by the expectation of price increases, rather than by local residents desire to move in and their ability to afford it, home prices start inflating artificially. Here’s what the housing market cycle looks like visually: But it takes time to build homes and apartment buildings, often measured in years, which means developers fall behind the market fundamentals. That sense of buying frenzy spurs developers to build ever more supply as well. “I’ll pay more for this property because I know future buyers will soon pay even more.” That assumption of future growth, rather than market fundamentals like local incomes, fuels higher pricing. Buyers assume that prices will continue appreciating at the current faster-than-average rate. In the second phase, excitement and high expectations begins spilling into the decision-making process. That begins to attract both speculative investors and homebuyers reaching beyond their comfortable price range. The housing demand is real, and causes prices to rise faster than the surrounding areas. It starts with a market where people actually want to live. Going a step further, real estate bubbles typically go through four predictable phases. Sure, there are other factors that can contribute to a housing bubble, but this general outline offers an idea of what a housing bubble is. The artificially high prices come crashing down, thus causing the bubble to “pop.” Homebuyers start scrambling to buy into the neighborhood, worrying they’ll get priced out if they wait any longer.Īt a certain point, demand dries up because no buyers can afford to pay the inflated prices. In turn, homeowners begin selling at inflated prices because of the increased demand. Speculators notice, and begin offering a premium for those homes greater than their market value, increasing demand. Imagine a neighborhood that appreciates steadily for eight years in a row. Fueled by speculation rather than inherent demand for housing, these artificially high property values prove unsustainable over time. To better understand if there’s a real estate bubble in 2023, we need to first understand what exactly a housing bubble is.Ī housing bubble forms when home prices rise higher than the market’s fundamentals can justify.
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