The Housing Bubble

Since starting this PF blog I’ve encountered the term the housing bubble more than a few times and as far as I understand it (please feel free to correct me if I’m wrong) is that in some regions of the country the housing prices have risen to such heights that the property values are quite simply overvalued and due for a significant drop. In some of these regions builders put up lots of additional housing to cash in on the strong market and in others people just kept buying for more. The problem with any form of ‘bubble’ is that inevitably someone will loose money.

I’ve always been a firm believer of the Latin saying Caveat Emptor which is let the buyer beware in Latin. If you’re buying a house or anything that will take years to pay off you cannot blame the market or ignorance if you loose money on the purchase. Granted some people don’t want to spend a lot of time or effort making sure their purchase is 100% bang on. This is why specialists like bankers and real-estate agents have jobs! If you’re not certain about a purchase then seek help; get professional opinions. Buying a piece of property that will subsequently loose say 15% of its value in a year or two is something that is potentially preventable. I know that if I were to buy a new condo in the region I live in I stand a chance of loosing money on the deal. Why? Well there are 6 condo developments in the area either under construction or will be under construction soon. I am not a real-estate agent but loosely track prices in the area and I see more units coming in. Without even knowing a lot of information I can see that there might be a downward pressure on condo prices, this isn’t necessarily going to happen but I can see this as a possibility. I would be a wary buyer in this market.

So when I hear about the housing bubble bursting I don’t really feel there’s anything to be alarmed at. Surely all the people buying houses in these regions are aware of this and have taken this into account. Unfortunately I doubt this is the case; we wouldn’t be hearing about a bubble if someone wasn’t complaining. The next thing that crosses my mind is the fact that this isn’t some drastically huge loss coming to a lot of people (don’t yell at me yet), a housing bubble isn’t like the dot.com bubble that evaporated billions in wealth. A house in an overvalued region will retain a significant portion of its value when all is said and done; in the dot.com days companies folded leaving no retained value.

A housing bubble for me is more of a price adjustment to more realistic prices. Prices will inevitable rise and fall over the course of time; what was once an expensive and exclusive neighborhood might be a slum now and 25 years down the road it might be an expensive neighborhood again. When it comes to things like real-estate I would tend to look at longer trends rather than the price increases over a year or two period.

Now with all that said people will still loose money, some will loose their homes and it is very unfortunate because the value of these homes will drop. The worst part is that the people who are likely to loose money probably couldn’t afford the prices in the first place. They overextended themselves only to find they might loose $25,000 or $50,000 of their savings if they were to try selling (maybe more). The lesson learnt here: don’t spend lots of money on something unless you know what you’re getting into be it property or an investment; use common sense and if you have none find someone who does to help you.

[tags]Housing Bubble, property, property value, overvaluation, common sense[/tags]

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