What Causes a Real Estate Bubble?

Many people are asking if we’re currently in a bubble. The short answer is no, but let’s take a closer look at what could change that, and what happened last time we were in one.

With the market headed in its current direction, I’ve been getting asked a lot recently whether we’re in a real estate bubble.

This is a valid question that's on a lot of people’s minds.

However, what I’d like to discuss first is what caused our last real estate bubble about a decade ago. Understanding those factors will help us see what might lead to another one. Today, I’ll be going over three of these factors.

1. Loose lending standards and poor lending products. In 2006 when the government made an initiative to lower lending standards, which disregarded things like bad credit, the loan products were also poor. Therefore, low lending standards increased the number of people on the market who were buying homes without the means to do so. It also increased the number of speculators, since you could buy a house for little money and then flip it for a profit.

2. Supply of homes. Looking back to 2006 in our San Luis Obispo area, we had 219 active listings. Recently, we haven’t even come close to that number. In fact, this July we had only around 90.
3. Glut of homes. Especially in conjunction with loose lending standards and poor loan products, this amount of supply became an issue. Too many people were buying homes just to flip.

Right now, we aren’t likely to find ourselves in a bubble. However, a few things could change that. If interest rates were to jump up, prices would likely be impacted negatively. Also, if more homes suddenly came on the market, this could affect home prices as well.

We must also think about big economic factors outside of real estate. If something can affect the general economy, it can affect real estate as well.

If you have any other questions or would like more information, feel free to give me a call or send me an email.