The second major housing bubble to pop in the past decade was arguably even more dramatic than the one that brought us sub-prime loans and crash-resistance policies in the 2000s. This new bubble saw a complete disruption in how we think about home ownership, and how we deal with it as a society.

By ignoring or downplaying the importance of hard assets like houses, debt-to-income ratios, and other important factors when evaluating homes, 2017’s new bubble showed little regard for long-term financial stability.

As a result, this new bubble showed little regard for its own constituents: members of its own community. People who were forced into the new bubble were caught off-guard and had very little opportunity to properly prepare for it.

This article will focus on identifying and warning of future bubbles, emphasizing the importance of hard assets and debt/income ratios.

Causes of the housing bubble

In 2003, the United States had two major housing markets: Boston and Miami. In 2002, they had more than a million homes and hundreds of cities throughout the country were hotbeds of housing demand.

In 2003, demand for single-family homes hit an all-time high as prices soared to record levels. At the same time, inventory levels were near record lows which led to strong market forces driving prices up.

These record market forces included a growing number of people looking for comfort in home ownership, higher household earnings and stronger household spending.

Home buyers at the time were willing to pay a very high price for what they got in return. Homeowners were willing to spend money on things like remodeling, insurance policies and maintenance before things broke down but these things wore off after a few months so there was no long-term savings effect.

Who got hurt from the housing bubble?

The people who bought houses during the housing bubble were heavily leveraged. They needed to make a loan to buy their house and they lived in fear of defaulting on that loan.

As houses became more expensive, these people began borrowing money to purchase their homes. Since they had so much money invested in their homes, they needed to make a loan to purchase it.

This escalated the amount of loans in the market, making it harder for other people to get loans. This caused a shortage of homes for sale, which increased the price of a house.

Who got hurt from this? People who purchased houses during the housing bubble were heavily leveraged. They owed too much on their previous jobs and home purchases reduced his or her ability to save for retirement.

This also caused large imbalances in the stock market, as those with lots of debt lost value in their investments.

What happened to those who lost money on the housing market?

After the housing bubble burst in 2003, interest in buying and selling real estate fell off. This put a substantial dent in the market, making it harder for less sophisticated investors to get into the market.

Real estate professionals were well-paid, which made it more difficult for less experienced investors to understand what they were getting into and to consistently pay off their investments. This contributed to a lower overall level of wealth within the U.S. than it might have if more novice investors were involved in the market.

Since 2007, when the bottom was hit on real estate investment, things have been slowly recovering. 2018 was another strong year for real estate professionals, meaning more new clients coming into their practice every year. 2019 will be another good year for new clients!

Despite this continued demand, 2016 was a turning point in terms of popularity for real estate investment as a whole. Today, fewer than half of all U.S. households invest in realty.

Will there be another housing bubble?

Recent data points suggest there may be another housing bubble forming. This time, it’s not just in places like the United States, but around the world as well.

According to data from the International Monetary Fund (IMF), worldwide home prices have increased at a faster rate over the past five years than during any other period.

This decade-long upturn in housing prices has resulted in increased demand and more supply, creating a challenging environment for everyone involved in the real estate business.

Demand for homes is high because of increasing household income and increasing demand for utilities and investments. People are also finding it more convenient and cost-effective to purchase a home rather than rent it, due to rising costs of living.

Higher prices

As we near the end of this housing bubble, prices are expected to continue to rise due to supply and demand. As more people enter the market looking to purchase a home, they will be forced to pay more for their property.

This will continue until there is more availability of homes and people are able to buy one. Once they have acquired a mortgage and purchased a home, it can be extremely difficult to get out of the purchase contract.

This is how it has been for most of my career: I help clients obtain a mortgage, offer them guidance on how to make their home investment work, and then watch as they spend & consume money on improvements & extensions until they own it.

Looser lending standards

Between 2003 and 2013, tough lending standards were in place. Today, they are not. This is a problem.

Many lenders naively believe that today’s economy will not change much in the coming years. That is a mistake.

If you are still needing loan financing, you have more of a chance to get it from a qualified lender who will give you the loan you need with minimal pressure to increase profits.

It is better to have a low-profit lender than no lender at all. We are seeing more and more individuals and even small businesses find out about this new way to get loans because people want easier access to money. It is cheaper and more efficient than before!

Looser lending standards also create an environment where people can make reckless decisions about how much money they want to invest or what investments they should make in order to gain capital. This has had a huge impact on the housing market as well as individual investors and large institutional investors.

Income inequality increases demand for assets with fixed supply

As wealth becomes more unequal, demand for assets with fixed supply increases. The wealthy can afford to keep spending money as they increase their holdings in assets with higher equity valuations.

This increased demand for assets with stable supply can be witnessed in the market today. Equity valuations are at an all-time high, and there is considerable speculation that these assets will continue to appreciate in value.

onyx cash flows indicate that the majority of people are investing in stocks at this point in time. Cash is also flowing into ETFs that track stocks, further confirming this growing confidence in the economy. This raises questions about what will happen when this confidence ceases to exist and people start selling shares, according to onyx analysis.

Unrealistic expectations of capital gains

Between 2005 and 2015, people were incredibly confident that buying and selling stocks was a quick, easy way to make money. With the introduction of the Nasdaq Stock Market in 2005, more than 500 new stocks were available to investors.

These new stock exchanges made it easier to start investing in large companies, as you did with an index fund. Plus, with their higher prices, new investors could afford to purchase shares at a premium price.

However, this phase of Bubble 2.0 ended when people realized that stock prices never go down. If you sell your stock at a low price, you just stuck money into another company’s sharemarket!

Nowadays, expectations are too high for stock prices. People believe that acquiring new shares will be easy money-time is constantly creating stress on the market.