Real Estate May 5, 2022

What is a housing bubble?

I get this question a lot.

So according to Investopedia:

A housing bubble, or real estate bubble, is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators pour money into the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices—and the bubble bursts.

Now ask yourself…does this sound like what’s happening today?  In my humble opinion, the simple answer is yes.  

You need to keep a watchful eye, however, on all mitigating factors:

1.  Foreclosure moratoriums were in effect in many states up until recently (from 2020 to 2022); this kept people in their homes, without fear of being foreclosed upon, as courts were closed and the process was halted.  Now that foreclosures are back on the table, the homeowners will have to decide if they negotiate with their lender to refinance, make up the defaulted amount, or sell the property and cash out, moving elsewhere.  This will add more inventory to the supply of available homes for sale, leading to a more stable market.  What will those homeowners do?  

2.  Landlords were limited in their eviction options during the Pandemic.  Stuck with deadbeat tenants, they were also unable to sell the properties and take advantage of the price increases to cash out.  Contrary to popular belief, most landlords are mom-and-pop investors who own an average of 7-8 rental units, all with mortgages.  If those landlords couldn’t sell or pay their mortgages because their tenants weren’t paying the rent, those landlords will want to proceed with the eviction process and either increase the rent to new tenants or sell the property to avoid a foreclosure.

3.  Lots of buyers are under contract with builders.  However, with increasing mortgage rates, some of those would-be buyers under contract may no longer qualify for that final mortgage, once the builder is ready to deliver.   Delivery of completed homes has also been delayed by supply chain issues, so many mortgages’ locked rates has or will expire prior to the completion of the property.  If those buyers cannot complete their purchase, they may default and cause those homes to be offered to new buyers.  Others may just close on the property and then re-sell it.

4.  Inflation is causing the price of everything to increase.  So the question is, how much more are buyers willing to pay for things?  Will consumer spending drop to the point of stagflation?  Will consumers choose to save rather than spend?  

5.  With interest rates rising on all short-term lending – car loans, credit cards, payday loans – will people with credit card debt, for example, be forced into bankruptcy to survive financially?  What effect will that have on the overall economy?  When consumer debt is up, they will have less money on a monthly basis to spend on extras.  Will the second car be sold?  Will they have to sell their house to get back into fiscal health?

6.  Many say that the US is entering into this inflationary period on a solid financial footing.  Mortgages were no longer given out willy-nilly.  People were required some skin the homebuying game.  True.  But many people took advantage of the increase in home prices to do “cash out refinancing”, taking out some of that equity to cover other debts.  When home prices settle, and some get angry that they owe too much on their house, will those borrowers choose to default or do short-sales?  

7.  Migration patterns:  with so many people moving to southern states or tax-friendly states, can those states experiencing the exit-migration support state, county, and city services without the tax revenue of the past?  Will you then see a reverse trend, as prices are too high in the recipient states?  There has been talk of Buyer-Remorse for those who panic-purchased during the Pandemic.  Will those people return to their original states?


So many questions and factors to consider.  And in the end, you need to decide for yourself based on your personal financial situation.