Understanding Real Estate Bubbles

Real estate market bubbles are marked by rapidly rising home prices, sales and financing activities beyond the 'normal' range of periodic up turns and down turns. While housing markets have been noted to demonstrate these 'cyclical' patterns historically, it becomes economically unstable when these trends are excessively volatile. The signals of a real estate bubble bursting are the following economic patterns:

•Numerous mortgage banks bankruptcy filings
•Significantly lower Home valuations nation wide
•Lower month over month home sales
•Considerable depreciation of both new and old homes
•Decreased home construction
•Devaluation of mortgage backed securities in capital markets
•Reduced earnings in housing industry companies

Causes of Real Estate Bubbles:

In the case of the U.S. Real estate market bubble of the middle 2000's, several different causes led to the steep rise and eventual burst of the bubble. These variables all contributed to a bigger rise and fall of the housing market than if only 1 or 2 of the following factors occurred.

•Housing trends tend to be cyclical by nature
•Liberal Bank policy and loan loss precautions
•Excess sub-prime and Alt-A type mortgages
•Adjustable Rate Mortgages (ARM's) heavily in default or foreclosure
•Lack of State and/or Federal capital regulation

International housing markets are not all regulated the same way and therefore may not be as prone to bubbles as the United States and the United Kingdom. Both the United States and the United Kingdom have experienced a rapid increase in home valuations in recent years. In the United States that bubble has burst, but as of fall 2007, the British housing market has not 'burst'. If the housing market in a particular country has stable appreciation of approximately 1-3%/annum and loan practices are more heavily regulated via stricter credit policies and higher bank borrowing rates it is less likely that country will experience a housing bubble.

Tips to Avoid Real Estate Market Risk: