What is a housing bubble?

A housing bubble occurs when homes are overvalued for no real reason, very much like the inflation of money. It is a problem because housing becomes unaffordable. Demand sparks the bubble, and as people continue to buy at higher prices, the speculation that prices will continue to grow perpetuates further escalation.

How is lending a factor?

Lending can play a huge role in a housing bubble. If lenders approve loans to people who are unable to afford them, people live beyond their means and struggle to pay their mortgage. Interest rates also play a role in home ownership, as lower interest rates increase the demand for homes. If too many people are living in homes they cannot afford, they default on their loans. This eventually pops the housing bubble, and the market crashes.

Upside down mortgages

As the housing bubble popped in 2008 and home values declined, many people ended up being upside down in their mortgages. This means you owe more than your home is worth.  People couldn’t afford their homes, and they couldn’t sell them in hopes of paying off their mortgage because their homes were no longer worth as much. This resulted in an entire economic downturn for the country, and it went into a major recession.

Somebody always wins during a bubble.

If the Phoenix area is experiencing a housing bubble, there are definitely people benefiting from it. Property investors buy property anticipating that the bubble will grow, and although this perpetuates the problem, they benefit. As far as the average homeowner goes, it’s not great. You may be able to sell your home for a greater profit, but that will just be reinvested into your next property, so it’s sort of a toss-up. If you sold for a high price, and the bubble burst, you may be able to purchase a nicer home at a lesser rate. You cannot rely on this, so it isn’t a recommended strategy.

When will property values decline in the Phoenix area?

Economist have been warning of an economic downturn for some time, but they don’t know when it will happen. Phoenix has some of the highest price growth the country, but nobody knows how big the bubble will get. You see, there is no clear definition of a housing bubble or its breaking point. All that is clear is that the price of homes in the Phoenix area is inflated, and housing bubbles don’t last forever.