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What I’m reading in the news regarding the housing market

Recently, I’m reading more and more that some so-called experts think that we might be heading into a housing bubble, especially in the suburbs of downtown Boston.

What is a housing bubble?

Before we jump into our current situation, let’s first take a look at what a housing bubble actually is. Also known as a real estate bubble, a housing bubble occurs when home prices rise at a rapid rate to a level of instability. Housing bubbles generally begin when there is a shortage of inventory and an increase in demand in a market. As the prices start rising, speculation begins to take effect. Consumers expect prices to increase further, so everyone wants to buy a home as quickly as possible. This drives up demand further and prices continue to skyrocket.

As we know from physics, what goes up must come down. So at some point, the steep housing prices become unsustainable and homes become overvalued. When this happens, demand begins to decrease and therefore, supply starts to rise. Suddenly, we’re in a situation where there are more homes for sale than prospective buyers. As a result, housing prices can fall drastically – and the bubble bursts.

What leads to a housing bubble?

Bubbles are a phenomenon that can happen in just about any industry, whether it’s homes, stocks, or gold. Traditionally, bubbles don’t often occur in the housing market because of the large financial responsibility associated with purchasing a home. However, with the right combination of factors, a housing bubble can begin. Here are several situations and variables that can occur, drive up demand, and lead to a housing bubble. 

  • A rise in economic activity. When the economy is doing generally well, people have more disposable income to spend on housing.
  • Low mortgage interest rates. This puts homeownership within reach for many hopeful homebuyers.
  • Loose mortgage lending practices. This is a major factor that led to The Great Recession as many lenders offered home loans to homebuyers without regard for their ability to repay.
  • New mortgage products. Specifically, those allowing the buyer to make low monthly payments. This can make the idea of homeownership appear more affordable than it actually is. 
  • A sudden increase in migration. For example, if a large group of homebuyers relocates from a certain area, this will increase demand and shrink supply driving prices up further. 
  • The time it takes to build a house. It generally takes a long time to build a new home which makes supply slow to respond to dramatic increases in demand.
  • Speculative and risky behavior. This can lead to more property investors entering the market, along with homebuyers who can’t afford the homes they are purchasing. 

Boston Real Estate and the Bottom Line

My thoughts I don’t see a major danger in the downtown Boston condo market, On the other hand, I think the Boston suburbs are approaching dangerous price points.

What are your thoughts?

Boston Real Estate 

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