A financial bubble occurs when the cost of an asset accelerates well beyond its actual value. This occurred with the tech boom in the ’90s when stock prices of internet startups climbed before anyone knew what the companies truly had to offer. When it became clear that the value of most of these businesses was far lower than believed, the bubble burst, and the American economy is still feeling the effects.
The current real estate bubble is a result of low interest rates, certain lending practices such as interest-only loans, and the weak performance of the dollar on the world market. In fact, the stock market problems that resulted from the tech stock bubble have opened up more investment capital for real estate, which has contributed the real estate bubble, as well.
Will the Real Estate Bubble Burst?
It is believed that all bubbles burst. The fact that real estate prices are climbing far faster than people’s incomes is an indication that this real estate bubble may not be an exception. However, there are experts who believe the real estate bubble will undergo more of a deflation than an actual burst. That is, the process will take longer, so people will have more time to make easy money on the real estate market and the panic will not be as great as the one that accompanied the stock market recession.
Some people in the real estate industry are quick to point out that the real estate bubble does not have that great of an effect on regular home buyers. They point out that the return on a home is not necessarily purely financial. Most people, after all, do not buy houses solely to make money in the future; they buy houses to live in.