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The National Association of Realtors ® Says there is No National Real Estate Bubble?
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Realtors® say last the National Housing Bubble was in the 1930s during the Great Depression.
The Only Problem - the Realtors' article simply ask the wrong question!
Home owners are not actually concerned about a National Housing Bubble. But, they are concerned about a Local Housing Bubble especially in areas where home prices have experienced sharp multiyear gains.
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The Realtors' article begins with the definition of a Housing Bubble:
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"As broadly interpreted a Housing Bubble refers to an unsustainable gain in home prices. The premise is that a price bubble is at risk of "popping," resulting in loss of equity"
Potential housing bubbles are always local because all real estate is local in nature.
As the article correctly points out supply and demand drives home prices. Local supply and demand is the key in understanding local potential housing bubbles. What the real estate market is doing in California is not a primary concern if you live in another state. You need local information to determine the potential of a local housing bubble.
Should you be worried? It all depends on who is buying.
To understand your local housing market look closer at recent home sales. Are the buyers new home owners who will actually occupy the homes or "investors" who are only speculating that prices will continue to rise so they can sell for a quick profit. The type of buyers in your local market will determine the potential of a real estate market bubble in your area.
What causes Housing Bubbles?
Housing Bubbles are created when the demand of homes is significantly greater than the current supply. This usually occurs when there is some limitation on the housing supply. Housing bubbles don't just happen overnight, they usually are some telltale signs that precede every housing bubble.
Low Interest Rates
Real Estate has always been a cyclic market driven in part by interest rates. During periods of low interest rates new first time buyers come into the market. They can't afford new homes so they buy existing homes. Low interest rates enable home owners who sell to move up to larger, nicer homes. This starts a buying cycle. Some owners also use low interest equity loans to get the cash to buy second homes or investment real estate. This increased normal real estate activity makes News and more people begin to consider joining the real estate buying trend. A Sellers Market then forms if the increased buying trend continues.
Sellers Markets Come First
Before a housing bubble begins you can observe a change in market dynamics as the demand of housing begins to exceed the normal supply. The first sign is the asking prices and the sales start to increase rapidly. Few properties are offered for sale. When a new real estate listing appears it sells relatively fast. This is commonly called a "Sellers Market." This is not a housing bubble but it can be an early warning sign of a potential future bubble if this trend continues and accelerates.
New Residents Increase Demand
For example: A new industry attracts an influx of new residents into an area. The new buyers all bid for the limited number of homes normally on the market and the prices start to rise. This situation is usually only temporary because as home prices rise additional home owners decide to sell and this new supply of homes for sale brings the local market back into balance.
Limited Availability of Land
A major limitation on the supply of housing is the lack of available land for new construction. In some areas of the country land development is limited due to zoning and/or environmental restrictions. This limitation increases the value of the land that can still be developed and makes the resulting lots more expensive for new home builders.
Builders Respond by Building Larger and More Expensive Homes.
Owners of existing homes in the area notice this trend and feel that this new construction has also increased the value of their homes when they decide to sell. So the prices for both new construction and existing home rise.
The Types of Buyers Begins to Change
As prices of homes in an area continue to rise new types of buyers begin to enter the market. These buyers are housing investors rather and home buyers. They normally don't intend to occupy the homes they purchase but are buying them in hopes of selling the houses later to a new round of buyers for a significant profit. This trend in itself is not yet a housing bubble.
Strong Hands Versus Weak Hands
The economic concept of Strong Hands / Week Hands applies here. In the case of residential real estate home owners who occupy their homes are the strong hands and the investors are the weak hands.
Home Owners Have More to Lose
Homeowners make both a significant emotional and financial investment in their homes and neighborhoods. If real estate values began to soften or even decline they are not affected unless they are forced to sell during this period. Selling your home and moving creates a major disruption of family life so it is not a viable option for the average home owner. Most home owners survive housing bubbles with no real loss. This willingness to ride-out periods of market softness is evidence of their "strong hands" approach.
Investors Cut and Run
Investors have an entirely different reaction to market declines. They don't have kids in school or care about the neighbors next door. Their first reaction is, "how I can cut my losses." They are buying and selling for a short term profit. They are not interested in the impact of their real estate sales on the other neighborhood residents. If their profit doesn't materialize in a relatively short time they sell at a loss and move on to their next investment.
Short Term Investors are at Greatest Risk
Short term investors accept the most risk in a real estate bubble. Purchasers of multiple homes as investments may have to dump some properties at a loss just to free up cash to make payments their other homes. Investors try to "time the real estate market" just like some investors try to time the stock market.
Homeowners - Don't Panic
Real Estate Bubbles have very little effect on financially sound home owners. You have to live somewhere. If you don't panic and sell during a local market downturn you will not be affected. Historically your home will be one of the most profitable investments you can make.
Read Anti-Bubble article titled: "Housing Bubble Prospects Q&A" on the Realtor.org web site.
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