UNDERSTANDING HOUSING BUBBLES & WHAT CAUSES THEM TO POP

Most homebuyers have the idea that once they purchase a home, the value of their property will never decrease. The real estate game is unlike the stock market where most people who invest in it understand and accept the inevitable risk that prices may fall. This is why investing in real estate with the proper knowledge or business partner will make or break your success .

If history has taught us a lesson, it is that there are bubbles in the housing market, and they will eventually pop! Strategy Properties is here to discuss what causes a real estate bubble, what triggers it to burst and why investors need to look for long-term goals in times of critical housing decisions.

THE HOUSING MARKET CRASH

If we take a step back in time to the mid-2000s, we experienced a housing bubble. Real estate values increased at a rapid rate, which attracted a lot of buyers and investors towards homeownership. Couple that with fairly low interest rates, loose lending standards and low down payment requirements, a lot of people who normally had trouble purchasing a home became homeowners. The housing bubble seemed to be holding its own, but was about to burst.

During this time, the U.S. Federal Reserve cut interest rates and held them down to stimulate the economy. This surge of money and credit met with a lot of government policies to encourage homeownership which promoted liquidity among real estate assets. Property prices rose, and a lot of investors got into the business of buying and selling houses.

Over the next few years, homeownership developed an insatiable mania. More people got into the investment real estate game, as interest rates plummeted, and even strict lending requirements were abandoned. The increased demand made home values rise artificially. Values rose at an unsustainable level. Eventually, prices reached a peak, and demand fell. This left many home-owners and investors in a bad position. As a result, investors eventually stopped buying houses because of the high amount of risk accompanied with it. A lot of buyers were rushing to leave the market which drove property prices down even faster. At this same time, because of some aggressive lending practices, and homeowners not really being able ot afford their homes, the number of foreclosures reached to almost millions across the country. 

WHAT HAPPENS WHEN THE BUBBLE BURSTS?

When real estate inventories increase, and demand decreases, the bubble will eventually burst. A prolonged decrease in buyer demand can be triggered by a number of things: 

Increases interest rates – this makes it harder for home buyers to purchase a new home, thus leading to lower demand. The lower demand then leads to lower prices, to bring more buyers around. 

Decreased demand – this slows the rapid pace of property prices that a lot of investors count on to make their purchases profitable. Lower prices mean many investors lost money holding their homes, or being forced to sell at lower prices. This leads to the loss of homes to foreclosure, because the investor cannot afford to hold the property, and if unable to sell with the reduced demand. 

Economic downturn – if history has taught us something, slower economic activity leads to lesser income and job loss (or the absence of available good paying jobs). This results in a decreased demand for housing.

HOW TO SURVIVE THE NEXT CRASH

We never know where or when the housing market will crash. It’s best to practice some counteractive measures to be prepared such as:

Invest in a Diversified Economy

Avoid any area that is highly dependent on a single economic driver. The same applies when one economic sector seems to be on the rise, it also takes the real estate market along. Take Detroit for example which suffered a huge blow during the housing crisis. Nowadays, Motor City has been showing great promise when it comes to the auto industry, and other industries taking hold through the Detroit Metro area. With a number of new job opportunities, the demand for rentals and housing continues to skyrocket.

Cash-flowing properties

If your property brings in more income than it costs to own it, you’re basically set when it comes to value. A sudden price drop wouldn’t affect you that much not unless you plan to sell. That’s why experienced investors purchase homes that produce income and experience price appreciation as a side effect. 

By focusing on these properties, avoiding non-diversified economies and bad neighborhoods, your investments can be safe regardless of the state of the market. It is important to know your exit strategy, before you purchase your investment house. Being diligent up front, will protect you, should a market crash occur. By mitigating risks, and making wise educated decisions towards future investments, you’re more likely to grow wealth over time. 

Understanding how a housing bubble happens, and how to survive when it burst, is important in helping you avoid being negatively affected. The real estate sector is proven to be a lucrative investment, and success is possible by working with the right people. Our team of professionals with Strategy Properties can help you with expert advice to help your investments flourish, and we also have a variety of investment properties for you to choose from! To learn more about our services, contact us at (734) 224-5454 or reach out to us via email at [email protected].