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No matter your age, you likely remember the last time the housing bubble popped. It was one of many events that led to The Great Recession.

Because housing values have recently increased so quickly, many of us can’t help but fear something similar is happening. Many of us are asking, what is going to happen to my home’s value? Will I be able to buy a house at a better price? How is all of this going to impact my neighborhood?

With solid information and sound judgment, you do not need to fear. You can make decisions in this crazy housing market with wisdom and peace.

Supply and Demand

As we have previously explained, the main difference between a hot buyers market and a hot sellers market is supply and demand. If there are more homes on the market than buyers for that market, then it is a buyer’s market because buyers have a lot of options.

If there are more buyers in the market than there are homes, then it is a seller’s market because sellers have a lot of options.

In an extreme sellers market like we are in now, the home prices go up. Why? Because the sellers have the options–they hold all the cards. If they want to get more for the home they are selling, they can because buyers do not have very many options.

The two most important portions of data that can be tracked to help predict a downturn in the market are the total number of homes on the market and the total number of recent sales (buyers) in that market.

  • SIGN NUMBER 1: The total number of homes for sale rapidly increases.
  • SIGN NUMBER 2: The total number of sold homes (buyers in that market) rapidly decreases.

Massive Defaults (foreclosures, short sales, bankruptcy)

Another data point that can lead to a rapid increase in homes for sale on the market (SIGN NUMBER 1) is home loan defaults. If people stop making payments on their home loan, then the banks will have to take ownership of those homes. If banks have ownership of a lot of homes, they will need to sell them because they are not in the business of buying real estate and letting it sit vacant for a long period of time. They want that real estate asset to be liquidated promptly.

  • SIGN NUMBER 3: Home loan defaults increase in large quantities.

Incorrect Assumptions

Here’s the thing, just because something increases in value does NOT mean it must go down in value. Is there a recent housing crash in our country’s history? Yes. Does this recency create incorrect assumptions about what is going to happen with this housing market? Yes!

The worst thing you can do when making decisions about housing is to assume what happened last time is going to happen this time WITHOUT looking at any data.

Here are the facts:

  • The last housing bubble burst was triggered by home loan defaults happening at a record pace. This is not happening right now.By all other data, it is not in danger of happening right now. The underwriting standards for home loans since the last crash have been extremely high. Only well qualified borrowers are able to obtain a home loan.
  • The last housing bubble had a significant decrease in buyers in the market because home loan guidelines and changes in the mortgage industry significantly limited people’s ability to qualify. There was an over correction in the lending world. That is not happening now.
  • The last housing bubble had a significant increase in homes for sale on the market because banks started foreclosing, short selling, and taking in ownership of homes en masse. That is not happening now.

The truth is, home values are increasing in most markets because there has been a significant decrease in home building since the last housing bubble burst. This has created a slow developing reality that supply is way lower than demand, so home values are legitimately higher. Is there a movement to start increasing home building? Yes. But it too will be slow developing and will eventually level out home values.

Markets ebb and flow. There are ups and downs. This is normal. Bubbles bursting? That is not normal, and assuming the current housing market is going to burst anytime soon is not wise. The data doesn’t back this assumption up.

For more information on the future of the stock market based on the influx of stimulus money, check out this blog: