Home prices in the US are soaring at a record speed. The median home prices have seen a 23.4% spike from the last year. Many of the homes in the real estate market are selling for record prices, and people are paying upfront cash for the houses after getting into competitive bidding wars with other buyers in the market. This situation is unlike ever before and real estate investors are currently benefiting from these gains in the price.
What Happened in the housing Market?
As the pandemic started, the government mandated social distancing laws, which caused businesses to shut down, which ultimately led to unemployment. To counter this economic backlash, the Federal Reserve decided to lower down interest rates, and this resulted in mortgage rates to crash.
As people began to buy homes due to the pandemic, the prices began to rise due to low inventory and not enough homes per sale. Today, housing prices continue to rise and many people fear a housing bubble that may be looking to pop.
The fear of the housing bubble crash may even lead to one if the apprehension starts to spread. Buyers do not want to be the ones suffering the losses if a transition happens and the bubble does happen to burst. If the housing bubble burst, it means that a large number of people’s wealth will be tied in risky assets.
Is a Housing Bubble Imminent?
The occurrence of a housing bubble is due to a growing demand in real estate which causes the price to spike, along with an influx of speculation which pushes the price higher than it should, and ultimately, when the speculations cool down, there is an instant drop in prices.
It is very difficult to focus on a single piece of data or an indicator to tell whether you are in a housing bubble or not. One of the more legitimate signs to look for when trying to decipher whether the housing market is in a bubble would be the intangible factors.
For example, if you see people having growing speculative mindset towards the market and the type of investors entering the market are ones that are simply pouring money because they expect an astronomical gain, then this may lead to a housing bubble. Another telltale sign is credit being too easy.
If you do not keep tabs on the bubble signs, then there is chance that supply does continue to rise and creep up on the panic investors. Once supply starts to shorten the gap, and demand suddenly decreases, this leads to a sharp decline in housing prices and the bubble pops.
Concluding Thoughts
Housing bubble pops when people begin to develop a shift in their mindset. They start to realize that the situation is not sustainable. This leads to fear in the market, and people that had bought earlier begin to quickly sell to get maximum profits.
This leads to a chain reaction of mass selling where some also sell houses for a loss. According to the current supply index, and market behavior, it is highly unlikely that the market is in a bubble. However, it is important for investors to always keep tabs of the situation.
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