During the mid 2000′s housing prices were going up swiftly not only in the United States but in many places around the world. Existing home prices increased 30-50% in a matter of years. In some desirable locations it was far more.
Why?
Well economic experts will be debating that for many years to come. Some say it was due to banks lowering lending standards combined with low IRs. Others say it was speculators driving up prices. Others say it was actually the government’s efforts to get everybody into home possession. After all , a good housing market leads to a good commercial market generally.
But housing bubbles have occurred before. Japan in the early 1990′s is an example. In the U. S. there had been a mini bubble in the latter 1980′s. But a bubble on the size of the one in America in 2007 is quite remarkable.
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 really overvaluations of assets. Real-estate business market experiences a fast increase in estimations of land or immovable property. These increases continue till they can't keep up. Retrospectively many housing price indicators forecast the bubble but owners and financiers who are involved with the feeding frenzy and seemingly making profits, seldom want to see the handwriting on the wall… Or the balance sheet.
Meanwhile householders and would-be owners are a part of the feeding hysteria. If you own a home that's suddenly worth twice what it was 5 years ago, you believe you are all of a sudden wealthy. If you're trying to buy a home you see costs going up and up and you're feeling you have to move speedily or you will miss out. The reality is these perspectives are both illusions and this “wealth” only exists on paper. At some point soon there will be a correction.
And if that correction comes after you recently purchased a home at top dollar or you refinanced to take money out of your seemingly high-value home, then you are stuck with a debt that's “underwater”. You owe more than you can sell your asset for. And if you get canned or have a fiscal emergency then you cannot maintain your payments. Then everybody loses including homeowners, banks, developers.
The problem is bubble bursts and we are left with a foreclosure crisis like we have today.
Rick Hart is an online business consultant. He provides tools for foreclosure lawyers in Tampa that help with loan alterations, short sales and foreclosures.
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