A Housing Bubble is a type of economic bubble that occurs periodically in certain real estate markets. It is characterized by rapid increases in home values until they reach unsustainable levels relative to incomes and other economic factors. This is followed by marked decreases that can result in many home owners sustaining negative equity. Not everyone can agree on the exact definition of a Housing Bubble.Housing bubbles have more to do with the economy and job outlook. If jobs exists and people feel confident that they will have a job for the foreseeable future, they will buy homes.
Keep in mind that the media can also have a substantial influence on whether or not a bubble takes place.
Housing bubbles tend to be rather regionalized or even localized. Areas which, for one reason or another, experience high demand with limited supply will see prices escalate quickly. Other areas with a more balanced market will experience lesser increases. This can vary even from town to town. Whether or not a given bubble with burst also depends upon numerous factors. Stability of the employment base, new housing units coming on the market, population changes, etc. all have an effect.
Housing bubbles can sometimes burst due to major employers leaving an area or a major downturn in an industry. This has been seen in areas like Detroit and Silicon Valley where the local economy is heavily tied to one industry.
Something that can often come into play in regards to the housing market is the concept of perception becoming reality. When consumers start to perceive that the housing market may soon bubble they hold off on making offers and purchases which serves to push the bursting of the bubble. In 2006, in most areas of Southern California experts seem to predict more of a leveling and slow decline of the market rather than a sharp burst of the bubble.
Real estate will always recover from a bubble bursting and continue to appreciate over time. It is still one of the best investments you can make for you future.
A more moderate appreciation of home values will still benefit investors buying rental properties. Many potential homeowners have been priced out of the market, but still need someplace to live. This has revitalized the rental market in some areas.
After a period of outstanding equity growth in a particular area, buyers may become worried of the bubble popping, and take a "wait and see" approach. This actually can contribute to the bubble popping.
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