The prices on the housing market tend to fluctuate, and the value of a single home can go up or down in a small amount of time. A homeowner may not think about the possibility that the value of their home can decrease quickly. It is important not to make the assumption that just because housing prices are currently doing well, that it will always be that way. Like any other industry, it has its ups and downs.
The housing market experiences housing bubbles, which is when housing prices are driven up by demand. When the “demand decreases or stagnates at the same time supply increases,” the bubble bursts and the prices go back down.
When the prices in the housing market rise due to demand, the supply can have trouble keeping up. Building additional houses to keep up with the demand is time-consuming and it can be difficult to keep up. In some areas that are already highly developed, there may not be anywhere to build more housing, which itself can increase the demand even more. If the demand increases too quickly, prices will definitely rise to keep up.There are many reasons why the housing bubble can occur, including:
The different variables tend to feed each other until they form the bubble.A housing bubble can have serious impacts on cities, neighborhoods, people of all classes, and the economy. Housing bubbles can lead to people having to find different ways to pay off their mortgages, and in some instances, it can cause people to dig into their savings and retirement accounts.
The state of the economy impacts everything. When it is good, and unemployment is down, people may feel like their jobs and finances are more secure, they are more confident about trying to secure a mortgage and buy a home. However, when the economy is doing poorly, people are getting laid off or getting much lower paying jobs, so they do not want to take on the amount of debt that comes with a mortgage.
Lower interest rates can be a big factor in the housing bubble. Home prices are usually high when the interest rates are low, because this helps encourage more people to buy houses. With a lower interest rate, people can buy a more expensive home, because borrowing more will not make a monthly mortgage payment go up much.
When interest rates begin to go up again, houses become less affordable without a price adjustment, because the higher rates can make a monthly payment go up.
In some areas that are considered to be more desirable, the housing prices may be on the rise, even when they are falling drastically in the rest of the country. This can occur in a more “trendy” area that people want to be in, a large company is bringing jobs to the area, or because there is a great school district in the area.
For example, between 2012 and 2018 the housing market in the San Francisco Bay Area saw a major rise than other parts of the country. The average price of houses reached $1.6 million in 2018. The city saw an influx of wealth as wages went up and unemployment went down, due to more tech companies moving there. There is not much room to build in the Bay Area, so rent and home prices began going up as homes began to fill.
Sometimes, the seasons can have an effect on housing prices. People tend to buy more houses in the spring and summer when the weather is nicer, because it is easier to move on a sunny day. So, when the spring buying season begins, house prices can increase to reflect that, and they can go down in the fall and winter, because not as many homes are bought during that period.
When the bubble bursts, it is generally because the demand is decreasing while the supply is increasing. There are a few reasons this can happen, and like with the creation of the bubble, they can feed off of each other until the bubble pops. These reasons include: