In the mid 2000's housing values were going up quickly , not merely in the U. S. but in several places around the globe. Existing home costs increased 30-50% in a number of years. In some in-demand locations it was much more.
Why?
Well economic gurus will be discussing that for several years to come. Some say it was caused by banks lowering lending standards mixed with low rates. Others say it was investors driving up costs. Others say it was the government's attempts to get everyone into home ownership. Of course , a good real estate market leads to a good economic market in general.
But housing bubbles have happened before. Japan in the early 1990's is an example. In the United States there was a mini bubble in the late 1980's. But a bubble on the scale of the one in America in 2007 is kind of unique.
A "housing bubble" centers on the idea that so long as market costs keep on rising outside their real value they therefore will eventually come into a rapid and seemingly bottomless decline and the bubble will burst. This is precisely what happened around the world.
Bubbles are actually overvaluations of assets. Property economic market experiences a fast increase in estimations of land or immovable property. These increases continue until they can no longer keep up. With hindsight many housing affordability signals predicted the bubble but house owners and investors who are concerned with the feeding madness and outwardly earning profits, barely wish to see the writing on the wall... Or the balance sheet.
In the meantime homeowners and wannabe householders are part of the feeding fever. If you've got a home that is all of a sudden worth twice what it was 5 years back, you believe that you are suddenly well off. If you are endeavoring to buy a home you see prices going up and up and you feel you need to move fast or else you will miss out. The truth is these viewpoints are both illusions and this "wealth" only exists on paper. Sooner or later there'll be a correction.
And if that correction comes after you just bought a home at top dollar or you refinanced to take cash out of your newly high-value home, then you're stuck with a debt that is "underwater". You owe more than you can sell your asset for. And if you lose your job or have a financial emergency then you can't keep up with payments. Then everyone loses including house owners, lenders, investors.
The result is, bubble bursts and we are left with a foreclosure crisis like we have today.
Why?
Well economic gurus will be discussing that for several years to come. Some say it was caused by banks lowering lending standards mixed with low rates. Others say it was investors driving up costs. Others say it was the government's attempts to get everyone into home ownership. Of course , a good real estate market leads to a good economic market in general.
But housing bubbles have happened before. Japan in the early 1990's is an example. In the United States there was a mini bubble in the late 1980's. But a bubble on the scale of the one in America in 2007 is kind of unique.
A "housing bubble" centers on the idea that so long as market costs keep on rising outside their real value they therefore will eventually come into a rapid and seemingly bottomless decline and the bubble will burst. This is precisely what happened around the world.
Bubbles are actually overvaluations of assets. Property economic market experiences a fast increase in estimations of land or immovable property. These increases continue until they can no longer keep up. With hindsight many housing affordability signals predicted the bubble but house owners and investors who are concerned with the feeding madness and outwardly earning profits, barely wish to see the writing on the wall... Or the balance sheet.
In the meantime homeowners and wannabe householders are part of the feeding fever. If you've got a home that is all of a sudden worth twice what it was 5 years back, you believe that you are suddenly well off. If you are endeavoring to buy a home you see prices going up and up and you feel you need to move fast or else you will miss out. The truth is these viewpoints are both illusions and this "wealth" only exists on paper. Sooner or later there'll be a correction.
And if that correction comes after you just bought a home at top dollar or you refinanced to take cash out of your newly high-value home, then you're stuck with a debt that is "underwater". You owe more than you can sell your asset for. And if you lose your job or have a financial emergency then you can't keep up with payments. Then everyone loses including house owners, lenders, investors.
The result is, bubble bursts and we are left with a foreclosure crisis like we have today.
About the Author:
Rick Hart is a web business advisor. He provides tools for foreclosure attorneys in Tampa that help with loan adjustments, short sales and foreclosures.
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