A bubble, in real estate, is a reference to an area where home prices inflate simply because people expect them to. These bubbles are dangerous because as soon as the expectation passes the actual ability for people to buy them, the bubble pops and the demand for homes plummets despite high supply. Home prices further drop in response. Therefore, housing prices rising drastically can be a sign of an impending housing bubble.

Housing prices from 2000 to 2006 rose exponentially, creating one of these housing bubbles. Real estate speculation bypassed the actual ability for buyers to purchase homes. Additionally, lending standards were poorly maintained and mortgage rates were extremely low. Homes were reported as 39% over their actual value at the height of the bubble. So when prices decreased, many people defaulted on their loans leading to one of the largest credit and real estate crises in America.

Still recovering today, lending standards are tighter, increasing the difficulty in buying a home, but helping home prices to once again rise. One area that may be rising too quickly after the last bubble is California, already known for pricey living standards and reported as the most overvalued market in the nation. There has been a 17% increase in home prices year after year. Prices seem to be soaring due to millionaires willing to pay the high prices and investors looking to grab up what land is left in supply. Other overvalued areas include Honolulu, Austin, and Miami, also dealing with limited supply and a high demand.

But nationally, homes are 5% undervalued and Jed Kolko from Trulia says that this is proof that  another housing bubble is not hovering around the corner. If prices were to continue to rise at this rate, though, worry would be necessary. However, price gains are slowing down and things look to be clear for the future. It may seem unlikely with homes selling for millions of dollars in bigger cities, but this supply is met by an equal demand of people able and willing to make those purchases. Expensive homes do not necessarily make a housing bubble.

And since the last housing bubble, consumer protection has been put in place to ensure that lending standards are sturdy and keep buyers from over-borrowing. There may not be a bubble on the near horizon, but it is always a good idea to keep an eye out on your local market and housing prices.

Article Citation: Yahoo Finance. (April 17, 2014). Are we facing another housing bubble? Yahoo! Finance. Retrieved April 20, 2014 from: http://finance.yahoo.com/blogs/just-explain-it/signs-of-a-housing-bubble-205544130.html.
Picture Citation: https://www.nytexaminer.com/2011/11/bill-keller-missed-the-housing-bubble/