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August 2, 2013

Q&A: What is a Housing Bubble?

Team Troy recently wrote an article about the Seattle Real Estate Market and rumors of a Housing Bubble. We determined that a Seattle Real Estate Market burst is unlikely. In response to our article, one of our clients wanted to know exactly what a housing bubble is. So, let us explain!

What is a housing bubble?

A housing bubble is a situation in which the demand for and the prices of real estate is at a peak, driven by artificial means such as low interest rates. How does this happen? In times of economic hardship,  the national bank attempts to spur the economy by lowering interest rates. This creates the incentive for many people to purchase real estate, as the cost of property becomes relatively cheaper to acquire. These low interest rates spark a massive demand to invest, including residential, commercial, rentals, and house flipping. As demand increases, this drives up home prices and creates a real estate boom. This uprise is know as the “Bubble”.

An increase in the real estate market can be fantastic for the economy as a whole… initially. It can create more homeowners, inspire construction projects, and provide more business for manufacturers of home appliances, etc. However, this is a short term boost.

These rock bottom interest rates are unsustainable in the long run, and the national bank must increase the rates to prevent inflation. Now buying real estate becomes relatively more expensive and there is less of a demand to purchase property. At the same time that real estate demand decreases, the supply of property increases, leaving much inventory with no prospective buyers. Pop! The bubble explodes.

Just as times are great in the housing bubble, times are rough when the bubble bursts. Nonetheless, the real estate market does return to the equilibrium in the long run. Prices will rise to fair market value and the demand to purchase real estate will slowly shift upward (the Seattle market recently recovered and is now flourishing!).

Have Questions? 

Team Troy is your Seattle Real Estate Market experts. If you are wondering what your Seattle home is worth in this rapidly changing market, give us at call: 206-588-3660 or visit our custom market insider tool:

View the real estate market trends in your area:

Housing Trend 8.01.2013