Are We In A Housing Bubble?

You probably have fond childhood memories of blowing bubbles through a wand and trying to keep those magical orbs aloft as long as possible. But eventually, every bubble pops and the fun fades.

The same is true of a housing bubble. Only when this metaphorical globule of hot real estate air bursts, prices plunge and homeowners suffer serious financial consequences.

This article explains what a housing bubble is and how it works, why housing bubbles are serious events, how they affect buyers and sellers, housing bubble historical precedents, and if we should be concerned that a housing bubble is happening or imminent.

What is a housing bubble?

It’s fast and easy to blow into a bubble wand and turn soapy water into a transparent balloon. A housing bubble can also form relatively quickly and expand rapidly yet also rupture rather suddenly. 

“A housing bubble occurs when property prices rise rapidly due to demand, speculation, and exuberant spending to the point that they exceed the underlying economic fundamentals,” says Dennis Shirshikov, an adjunct professor of economics at City University of New York and head of growth at GoSummer.com.

“It’s called a bubble because, like a soap bubble, the prices can expand only until they reach a limit and then suddenly burst, causing prices to plummet rapidly.”

Mortgage specialist Brian Quigley, founder of Beacon Lending, says housing bubbles are unsustainable.

“During the bubble, prices may rise far beyond their intrinsic value, fueled by investor speculation and excessive lending,” he notes. 

A housing bubble is different from a “real estate crash,” although the latter describes what happens when the bubble bursts.

“A housing bubble is a period of rapid price increases, while a crash occurs when those inflated prices collapse – leading to a downturn in the housing market. Essentially, a bubble precedes a crash, which is characterized by falling prices, increased foreclosures, and a decline in market activity,” continues Quigley.

Bubbles are almost always driven by irrational optimism.

“When people start talking about how assets essentially can’t lose and will just go up in value forever, that’s a clear sign that a bubble may be on the way,” Martin Orefice, CEO of Rent To Own Labs, says.

Why is a housing bubble serious?

Make no mistake: A housing bubble is an undesirable event that can have significant consequences.

“A bubble is serious because its bursting can lead to a steep drop in property values, leaving homeowners with negative equity – meaning they owe more on their mortgage than their house is worth – and potentially resulting in a cascade of foreclosures. It can also cause widespread economic disruptions and slow down the housing market considerably,” cautions Dayten Rynsburger, founder and CRO of Niche Capital. 

Additionally, “once people realize that the underlying assets that expanded the bubble aren’t actually as valuable as people thought, any stocks or other assets supported by them will collapse in value,” explains Orefice. 

But the pain doesn’t stop there. The resulting downturn can have ripple effects throughout the economy, impacting industries related to real estate and construction, per Quigley.

When was the last housing bubble?

It’s been a few years, but we last had a housing bubble in the early 2000s, which peaked around 2006 before bursting in 2007 to 2008, leading to the Great Recession.

“This bubble was caused by a combination of factors, such as loose lending standards, speculation, and government policies promoting homeownership. As housing prices increased, many borrowers took out risky mortgages they couldn’t afford to pay, leading to tumbling home values, foreclosures, and a collapse in the housing market,” Quigley notes.

Housing bubbles have been observed throughout American history, with prominent examples occurring in the 1830s, 1880s, late 1920s, and early 1970s.

Recovering from a real estate crash following a bubble can take several years. Consider that home prices didn’t bounce back until around 2012 following the 2008 housing crash.

Why should home buyers and sellers care about a housing bubble?

Readying to sell or buy a property? It’s smart to keep the possibility of a housing bubble on your radar. 

“This topic is crucial for home buyers, sellers, and borrowers because it directly impacts their financial decisions and risks,” says Shirshikov. “Those concerned about a bubble should focus on long-term affordability and sustainability rather than speculative gains. You should consider delaying a purchase until the market stabilizes.”

If you’re a prospective seller, on the other hand, and you suspect a bubble exists and is expanding, you might want to list and sell your home soon to take advantage of rising home prices. 

“If you have been trying to buy a home but haven’t been able to afford one yet, a popped bubble can be great news for you,” says Orefice. “Remember that many homeowners were only able to purchase their homes years ago thanks to the crash of 2008.”

If you’re a homeowner who doesn’t plan to sell, a bubble could still spell trouble. 

“Your home could suddenly lose serious value, meaning you could end up underwater on your mortgage,” Orefice warns.

If you have an adjustable-rate mortgage loan, refinancing to a fixed-rate mortgage loan could be a safer bet to protect against rising rates during a bubble.

Even if you are not preparing to purchase or sell a home anytime soon, the prospect of a housing bubble should be concerning. That’s because, when the bubble bursts, it can have negative effects on the entire economy, including jobs and the stock market.

“It’s important to stay informed and approach real estate investments with a clear understanding of both your personal financial situation and broader market conditions,” recommends Rynsburger. “Diversifying investments and being cautious with borrowing can help mitigate risks associated with potential bubbles.”

Are we in or near a housing bubble?

Consult the experts and the verdict will vary: We may or may not be currently experiencing a housing bubble or heading into one.

“Currently, some market indicators such as elevated home prices and high demand suggest bubble-like conditions. But other factors, like tighter lending standards and a significant shortage of housing inventory, complicate this picture,” Shirshikov says.

“Whether we are in a bubble or not may vary regionally and requires careful analysis of local conditions and fundamentals.”

Ask Kris Lippi, a real estate broker in Hartford, Connecticut, and he’ll tell you there’s no bubble in sight—at least yet.

“I don’t think there will be one. The textbook causes of a housing bubble are speculation-driven price growth and easy capital availability, which can’t be seen in the current market,” Lippi says.

“Sure, housing prices have gone up in recent years but it isn’t due to speculation. Remember that lending standards are much stricter now, so risk-taking behavior is not encouraged. This differs from lending standards 20 years ago, when mortgages were easily available.”

But Orefice is concerned about some troubling market indicators.

“The fact that large private equity firms have been buying up starter homes, thereby inflating their values, could be a sign that we are in a housing bubble already,” he says. “But there is also a very real lack of available housing, driving prices up right now, which can also explain the inflated home values.” 

The Bottom Line

The real estate market may be showing some red flags, but there’s no five-alarm fire blaring that a major housing bubble is underway or a real estate crash is looming. If you’re yearning to buy a home and have done your financial due diligence – knowing you have good job stability, healthy expected earnings, and a high likelihood of qualifying for financing – don’t be afraid to shop around for a home and a mortgage loan.

If you already own a home, consider refinancing to a more affordable loan at a fixed interest rate that can yield bigger long-term savings.