During the past two years, the real estate industry has experienced unprecedented changes that have led many Americans to question the stability of the housing market. The government foreclosure moratorium and mortgage forbearance programs helped over 7 million homeowners remain in their homes during the pandemic, however, while many people expected to see a foreclosure wave take place after these programs came to an end, the housing market in fact grew stronger. Thanks to recession-induced low interest rates, remote work surges, and eager buyers, the housing market boomed with median home prices rising nearly 25% within the span of a year.
However, as the housing shortage continues to increase the average cost of a home at an unsustainable rate, many Americans are now fearful that in upcoming months the housing bubble will burst, causing another foreclosure wave.
Although it is impossible to know how exactly how the housing market will fair in 2022, Tiffany Bucher of Foreclosure Excess Proceeds, hopes to calm the many concerned American homeowners by diving into the exact reasons why housing bubbles burst and what the warning signs may be.
What Is a Housing Bubble?
A housing bubble occurs when an economy experiences a large jump in housing demand with limited number of available housing. This demand grows when speculators enter the market, making the bubble also increase as more and more individuals fight over limited properties and flipping opportunities. With limited inventory and high demand for homes, prices will continue to rise.
What makes housing bubbles risky is not only their impact on the real estate industry but also on homeowners and their finances. Housing bubbles often will have major effects on the economy and raise interest rates and lending standards. This makes it more difficult for everyday homeowners to keep up with their mortgage payments, forcing many to take from their retirement and savings to keep their homes. However, as many housing bubbles follow periods of financial hardship, many households will already have limited funds forcing them to declare bankruptcy and eventually foreclose.
What Causes Housing Market Bubbles?
Like any other good or service, the average price of housing is driven by the age old principles of supply and demand. When there is a high demand for housing with limited supply, the average price of a home will drastically increase. Additionally, housing supply is often slow to improve meaning prices will continue to rise for a prolonged period adding to the already growing housing market bubble. As we are currently seeing in the American housing market, the US is short roughly 5 million homes, however, it will likely take longer than ten years to see this demand met. While it is clear to see that housing market bubbles are driven by customer demand, there are many variables that increase this demand:
- Increase in population/ increase in the number of individuals entering the housing market
- Low interest rates or short-term interest rates
- Improved economy and increased disposable income
- Increased home-flipping
- Potential miss-pricing of risk by mortgage lenders and mortgage bond investors as seen in the 2008 housing crisis
- High-yielding structured mortgage-back securities
- Lower underwriting standards and increased access to credit
- New mortgage products that make homes more affordable to new demographics
Forces that Burst the Bubble
What often causes a housing bubble to burst is when excessive risks are taken at various levels of the housing system and housing prices are no longer close to their fundamental value. When risk is perceived throughout the housing system by mortgage lenders and property investors, typically when homeowners have already started experiencing losses, a burst is likely to happen. When the supply of housing eventually increases in response to the housing demand, it will cause housing prices to fall, destabilizing the housing market and dramatically decreasing the value of the homes currently on the market. The realization of risk throughout the housing industry is often caused by a number of variables including increased in interest rates, lowering of housing demand and increase of supplies. However, perhaps most dangerously is an economic downturn. When a country experiences high unemployment directly following a housing bubble, particularly if a recession takes place, it often signals a housing bubble burst is about to take place. As a housing bubble is driven by demand, a burst occurs when the demand is lowered or when consumers are no longer able to afford the high prices caused by the bubble. Tiffany Bucher of Foreclosure Excess Proceeds states that when this demand is no longer viable, the realization of risk triggers prices to fall throughout the system leading to the housing bubble bursting.
