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Housing Bubble Takeaway for 2022

What is a Housing Bubble

We begin with the definition of a housing bubble according to the experts. It starts with an increase in demand. Demand occurring simultaneously with limited supply. And speculators buying with plans to sell thus create more of a demand. Subsequently, demand decreases or stagnates while supply increases thus causing a housing bubble. 

Here are some of the unusual circumstances that occur to cause the bubble:

  1. manipulated demand
  2. speculation
  3. unusually elevated levels of investment
  4. excess liquidity*see link below for definition
  5. deregulated real estate financing market
  6. extreme forms of mortgage-based derivative products

All causing home prices to become unsustainable. It leads to an increase in demand versus supply.*

Signs Not Forecasting Housing Bubble

Most of the experts do not foresee a real estate bubble but that does not mean house prices will not go down. In a recent survey from newnation.com, they site clear economic indicators that created the spike in housing prices this time.

At the end of 2021, home prices were 18.5% higher than they had been just a year before, according to CoreLogic. And just when you think prices could not get any higher, they have. In January 2022, home prices climbed yet again as home inventory reached a record low, according to the National Association for Realtors. The median price of a home has topped $350,000 nationally.

With astronomical numbers like that, it is hard to believe this is not a housing bubble, but real estate analysts agree it is not. Here is what is really going on.

Significant purchase of second homes by those that could afford it… and in the preliminary stages of the pandemic, city dwellers in high-density units sought refuge in suburban or exurban environments that had greater separation between households, lower densities, more recreational amenities that were consistent with pandemic safety and things of that sort.

The Millennial Homebuyer  

Furthermore, as Fortune previously reported “we are in the middle of the five-year period during which the largest tranche of millennials, those born between 1989 and 1993, are hitting their thirties—the age when first-time homebuying really kicks into gear.” Moreover, the housing costs are lower now than approaching 2008,  people were paying 7.2% of U.S. personal income was going toward mortgage payments. 

There are some of changes ahead considering the mortgage rates and inflation could cool things down. However, there have been no signs of that yet. The mortgage forbearance also posed some concern of foreclosures but even that is unlikely to create a supply excess: An analysis done by Home.LLC for Fortune forecasts the end of mortgage forbearance would only cause a temporary 11% rise in inventory. 

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*Excess liquidity definition

*To learn more about investing and housing bubbles check out investopedia.com or deregulation.