What is a housing bubble and what happens when it bursts?
Ever increasing house prices alongside inflation has people wondering when the bubble will burst. What is a housing bubble and how are they created?
A housing bubble is a situation in which demand is high for homes and prices have been inflated, usually due to low availability.
This leads to intense speculation. Not speculation in terms of what thinking what might happen next, but market speculation. Real estate has become a key part of investor portfolios for decades now and bubbles provide the perfect opportunity for investors to make money quick. Those families looking to buy their first houses become priced out.
As more people buy the homes, the prices increase; pretty basic supply and demand economics. Historic low interest rates during the covid-19 pandemic allowed many Americans to purchase homes with low mortgage rates, initiating the first step of the bubble.
However, this will inevitably reach a point in which the investment becomes no longer worth it, leading to the bubble bursting. With interest rates set to be their highest since the 2008 financial crisis, mortgage rates are similarly rising. The market has already begun to slow, increasing fears of the bubble bursting.
What happens when a housing bubble bursts?
Firstly, it is important to explain why a bubble would burst in the first place.
Eventually, the constant rise in prices become unsustainable. This is getting close to the situation in the US today where continuous rising prices are being shadowed by a looming recession. Houses stop being sold, and prices decrease. As home owners rush to sellhouses, prices drop further and the bubble bursts.
So what is the fallout?
Banks will want a return on the money they have put in for a mortgage. If a recession is due to follow, then people could be left short-changed when trying to pay their mortgage. Back in the last big burst in 2009, it is estimated that around 2.3 million households were foreclosed which impacted a staggering ten milllion people.
It is a problem based on the idea of home ownership as an investment opportunity, rather than what should be considered a bare essential for many people to live. In 2021, one in seven houses purchased in the United States was bought by an investment firm. This is a 2.8 percent increase over 2020. The investors will stand to lose money if the bubble bursts; families stand to lose much more.