Are You Buying In A Housing Bubble? How to Know

What You Need to Know About Buying a Home In a BubbleIn the last decade, the term "housing bubble" has come to have a lot of meaning to homeowners and anyone hoping to buy a home. A housing bubble has the ability to impact the living conditions and broader economy in the area where the bubble is taking place. Knowing what a housing bubble is and what can be done to stay financially solvent during a bubble is important. Home buyers and homeowners who are cognizant of what a bubble is and who are able to make smart financial decisions can protect themselves from big financial losses.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Housing Bubble Defined

A housing bubble is a market condition that occurs when the price of housing rises sharply, home values increase dramatically and many people who might like to buy a home are often shut out from the market. This is an untenable situation that eventually results in a "pop," that is, a sharp decline in home sales and a loss of property value.

Homeowners who purchase their home during a bubble often also have inflated mortgages. When the bubble bursts and home values plummet, it becomes common for homeowners to owe more money than the home itself is worth. This is called an "upside down" or "under water" mortgage. Homeowners who owe more money than the house is worth must pay down their mortgage before selling, wait until home prices increase once again or be prepared to pay make up the difference between what the home sells for and the mortgage when the home sells.

Signs of a Bubble

It's easy to confuse a healthy housing market with a bubble. When prices rise and buying a home becomes more challenging, many people will naturally start to worry. Still, there are certain signs that can help home buyers tell the difference between a bubble and normal market conditions.

Home Purchases are Heavily Leveraged

Because home buyers are unable to afford the homes they may desire, they may begin buying homes at the top of their mortgage pre-approvals. The bigger the mortgage loan, the larger the monthly repayment amount. This can cause hardship for the homeowner over time should home prices decrease dramatically.

Mortgages Come a Little Too Easy

Unable to obtain a mortgage loan from regular banks or mortgage brokers, some home buyers may turn to predatory lenders. Often, these loans are easy to obtain but difficult or impossible for the buyer to pay back. When the bubble crashes, these home buyers are more likely to default on their mortgage. Examples might include negative amortization loans or piggy-back loans.

Should You Buy In A Bubble

The question of whether or not to buy when there is a housing bubble is a complicated one. It's important for buyers to realize that most of the time it's impossible to gauge whether or not there's a bubble until it finally bursts. What looks a bubble may not actually be a bubble, while some bubbles can go on undetected until they pop.

It's not always wise to put Tipton County home buying plans on hold just because a bubble may exist, especially if a home is needed for other reasons. Home buyers who are concerned can consult with a real estate professional and financial planner to decide whether or not the time is right to buy. Often, looking for a home in a more affordable area is a wise move. Staying within a normal range of mortgage debt by avoiding a highly-leveraged home purchase or making reasonable upgrades to an existing home is a good way to avoid problems in the event that there's a market correction after purchasing a home.

Work With a Real Estate Professional

If you're a home buyer who is concerned about buying in a bubble, contact a reputable real estate professional. Your real estate professional can help you decide where you can find the most affordable neighborhoods in your area.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

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