housing bubble

Will the Housing Bubble Pop Soon?

History is bound to repeat itself, which is why this is such a hot topic

Philosopher George Santayana said, “Those who do not remember the past are condemned to repeat it.” So let’s take a moment to jog our memories with a brief history lesson — you’ll find out why it’s relevant in a few minutes.

Do you remember the global financial crisis of 2007-08? Of course. It was a monumental disaster triggered by the subprime mortgage crisis and collapse of the U.S. housing bubble. It was the worst housing crash in country’s history and nearly caused a second Great Depression. What caused the bubble?

  1. Price surge. After the mid-1990s, housing prices went on a sustained surge through 2005 before peaking in July 2006. Residential real estate was not only a great investment, but also seemed to be a very safe one. In some markets, such as Las Vegas and Phoenix, the housing market climbed almost 40% in a single year.

  2. Low interest rates. Following the burst of the tech bubble in the early 2000s and the September 11 terrorist attacks, the Federal Reserve drastically reduced interest rates and then maintained them for a lengthy period of time. Because it was so easy to borrow money, everyone did. People bought pricier houses than they could afford because they could get the loans. Eventually subprime borrowers were plagued with too much debt and couldn’t pay their mortgages.

If you’ve ever chewed gum, you know that bubbles can only get so big — then they pop. And that’s precisely what happened: When home prices finally reached unsustainable levels, the bubble burst. A lot of homeowners and investors were caught off guard and U.S. foreclosure filings spiked by more than 81% in 2008.

13 Years Later

Many people were left speculating about the failure of economists and financial analysts to predict the housing bubble and forewarn of its collapse. Everyone is wiser now, possibly scarred from their experience over a decade ago, and on the lookout for telltale signs of another burst bubble. So, will it happen again soon?

There are several criteria we can look at to determine how the housing market is doing in 2021. Let’s examine real-time numbers:

  1. Higher housing prices. In June 2021, home prices across the U.S. surged 24.8% year-over-year, according to Redfin. The median sale price was $386,888. And 56% of homes sold above their list price, which is a record high. Finally, these prices didn’t deter buyers, as the typical home sold in just 14 days. That means homes sold for their highest prices and more quickly than ever.

  2. Higher interest rates. Interest rates are on the rise, slightly which means demand for housing could fall. The average rate for 30-year fixed-rate mortgages increased to 3.06% from 2.99% just last week. Not surprisingly, mortgage applications to purchase a home fell 2% for the week. The higher the interest rate, the less house people can buy — existing homeowners won’t want to buy a new home and leave their lower locked-in interest rates if it means they have to pay more to borrow the same money.

  3. Lower inventory. Inventory remains low, which has been a problem for years — but it was incredibly low this past spring. According to Fortune, “the number of homes for sale in the country rose 10% — up 23% since bottoming out this spring.” Prospective homebuyers and investors are still experiencing the most competitive market we’ve seen in the last few years.

Now, I’m not saying we are truly in a bubble yet or that it’s about to burst. Of course, hindsight is always 20/20 in these matters. But I am here to provide a warning that history does have a history of repeating itself, so doesn’t it make sense to be on guard?

There’s no time like the present to start preparing for bad times, and having a solid financial education is your best offense.

It all begins with understanding that money doesn’t make you rich.Your financial IQ is what makes you rich. You can learn more about some ways to prepare here. Even though you can’t control how the economy behaves or when a bubble will pop, you can absolutely control your ongoing education and financial prowess to minimize its impact.

Original publish date: April 26, 2018