By: Laura Reginelli
According to mahalo.com, a housing bubble occurs when there is an “increase in housing prices relative to interest rates and personal incomes. Once real estate values reach inflated levels, as compared to personal income, the bubble can collapse, resulting in a marked increase in loan defaults.” During a time of a housing bubble, prices of homes skyrocket in value without any physical changes being made to the actual house itself.
Sometimes the prices of homes become so greatly inflated that they are too hard to sustain causing the bubble to “burst.” As the housing bubble bursts, sales of homes decrease tremendously.
A particular case study conducted on the California real estate market explained that the mass availability of credit helped aid the housing boom in prior years. As credit became more available to the masses, it became easier for people to purchase homes that they may have not necessarily been able to afford otherwise. In respect to our recent economic downfalls, it is important to assess if you can really afford a house when deciding to take out a loan on a new one. Without doing so you may be in for a rude awakening.
Housing bubbles occur in a cyclic manner and are not necessarily predictable. When thinking about purchasing a home, make sure to check the market and where the bubble stands prior.