If you’ve paid any attention to the economy over the past ten years, then you’ve noticed that things have been a bit tense. There’s a lot of discussion as to why, with everything from “Obama did it” to “maybe aliens”, but most people don’t take those claims seriously. However, there is one claim that many people do take seriously. Namely, the real estate bubble.
For many people, when you ask them what a real estate bubble is, you get something about subprime mortgage loans and big bank lenders. That’s not exactly informative, especially if you don’t already know
what those terms mean. This means it can be incredibly difficult to get a straight answer on what, precisely, a real estate bubble is. That’s not even mentioning how a real estate bubble might have caused a recent financial crash!
Luckily, the answer to these questions is not particularly difficult. It just has to be explained piece by piece.
What Is A Market Bubble?
Before you can understand a real estate bubble, you have to understand the concept of a market bubble. The truth is that any market can have a bubble. It’s not specific to real estate.
Back in the year 2000, you may recall people referring to the “dot-com bust”. That was about an e-business bubble that had grown. You can go back even further, if you so choose, to the 1920s in the United States. The stock market crash was caused by the creation of a stock market bubble.
In simple terms, a market bubble is a period of rapid increase in the cost of certain products. In the case of a real estate bubble, that product would be real estate. Back during the 2000s, that product was internet businesses.
Why do these bubbles popping cause the market to crash? Because a bubble bursting doesn’t only mean that the cost of a product drops. It means that it falls suddenly and significantly, to the point where products may only be worth a small fraction of their original price. In some situations, this price drop can happen over night. This means that many businesses or individuals that had invested in the product suddenly have much, much less money than they did before.
Think about it. You have a piece of property that’s been estimated at $100,000. That means, on paper, you have $100,000. It’s more complicated than that, but for the definition of a real estate bubble, this works. Since your investments and holdings say that you have $100,000, that means you have an excellent line of credit. People offer you loans for other investments, or sell you other products on credit, with the idea that you can pay them back based on the fact that you have this product worth $100,000.
Suddenly, almost over night, the price of your property drops to $20,000. Now the people who extended you credit are less sure about your ability to pay. Instead of being willing to wait for you to pay them back, they want their money back right now. You could have dozens of different lenders, all demanding you pay them back. Even if you could liquidate the asset immediately, you won’t get $100,000 for it. You may legitimately be unable to pay back the money you owe.
That’s the problem with a bubble. They burst.
The Bursting Of A Bubble
Bubbles burst for a number of reasons, but they all boil down to one thing. The market realizes that the real worth of a product is much lower than the estimated value of a product.
Bubbles start because investors believe a product is worth a certain amount. To get that product, people take out loans for that amount. If enough people are taking out loans for a product, then the product seems worth even more. This cycle continues until the estimated value of the product becomes too much for the market to bear. Either people begin defaulting on the loans, or people attempting to sell the product can’t find people to buy at that price.
Either way, the result is a bubble burst, a market crash. The only way to keep this from happening is by enforcing regulations on how much product can be sold for, or how much money can be lent for a product. Otherwise, the market will continue the boom and burst cycle. As a result of the market bubble and the burst of the bubble people save their money to invest at a certain time, for information on when to invest into a house please visit http://cardasmugridge.com/.