Real Estate Bubble – Explained
- Articles, Blog

Real Estate Bubble – Explained


When the Great Real Estate Bubble burst
in 2008 it triggered the worst recession since the Great Depression. You would think that ten years after the
bubble’s peak that we would have come to some consensus on what caused it and how
to prevent another one. But nope, there’s still no consensus. People are
still arguing after all these years. So I spent a couple of months trying to
figure it out for myself and found an easy way to explain the basic economics
behind the Great Real Estate Bubble. Economists like to say about
inflation that prices are determined by how much money is chasing how many goods.
The “how much money” part measures demand and the “how many goods” part measures supply. It
turns out this simple frameword also works great for explaining the boom and bust in
home prices in the Great Real Estate Bubble. So let’s get back to basics and look at
how much money was chasing how many homes in the Great Real Estate Bubble. First let’s look at the second part, “how many homes.” Homes are the textbook
example of what economists called inelastic supply. Most products are kind of like iPhones,
if the new iPhone is a hit, great, Apple makes a zillion more iPhones but they don’t
increase the price of iPhones. Homes are different. If your town suddenly became super
cool and cool people all over the world want to move there, home prices in your
town would skyrocket. The supply of homes is fixed in the short term. So even small increases in the amount of
money chasing homes can cause big increases in home prices. In the long
term in cities where it’s easy to build new homes, prices will come back down but in cities
where it isn’t, they won’t. Now let’s go back and look at the first
part of that equation, “how much money.” Two factors determine how
much money is chasing homes, how much money people have and how much
money people can borrow. And two huge factors that determine how much money
people can borrow our interest rates and how loose mortgage
companies are with their money, or with money. From the early 1990s
to the peak of the Great Real Estate Bubble mortgage companies became a hell
of a lot looser with their money. They loosen up slowly at first but then
faster and faster and crazier. FHA became loser. Fannie and Freddie became
looser. Subprime companies became looser and in
addition the number of subprime mortgages skyrocketed. Back in the early 1990s, if
you couldn’t get a prime mortgage you might not be able to get a mortgage
at all. Then some small enterprising mortgage companies started to sell high
cost, subprime mortgages to people with iffy credit histories who couldn’t get
low-cost, prime mortgages. by the late 1990s, easier
mortgages and a strong economy we’re making a lot more money available to
chase homes. Home prices started to rise fast in some
cities. For example, the home price index for Los Angeles increased 14%
in one year alone, 1998. Then the Dot-Com bubble burst in 2000, the
stock market crashed and a recession began. To pump up the economy, the Federal
Reserve lowered interest rates drastically. Interest rates on 30-year
fixed-rate mortgages felt 3 percentage points from 2000 to 2003. The
lower rates meant people could borrow a lot more money to chase homes, if they wanted to anyway.
With the same monthly payment you could borrow nearly 40% more
money in 2003 compared 2000. If you switch to an adjustable rate
mortgage, you could borrow 60% more. If you switch to a subprime
mortgage, you could borrow even more. Los Angeles, for example, already had a
really tight real estate market and its economy wasn’t as hard hit as others by
the Dot-Com bubble burst, so the new, low interest rates sort of
freed prices in LA to rise. Higher prices made people want to buy homes right away
before prices increased even more. So prices increase even more. With the rapidly
rising home prices, subprime mortgages became more popular because people
wanted to borrow more money and more people want to borrow. Everyone was talking about home prices.
It was as if the Dot-Com mania is simply shifted over to real estate. California
real estate speculators were making big bucks. Some took their winnings and moved on to
Las Vegas and Phoenix which triggered bubbles there. I should mention the most US cities did
NOT have real estate bubbles. Home buyers in non-bubble cities could have
borrowed a lot more money to chase after homes, if they wanted to, but they didn’t
want to. So, why not? Most likely they didn’t need
to. Their real estate markets weren’t that
type. Home buyers could find homes they wanted to buy without borrowing more
money and bidding up prices. And part of it MIGHT be that the people in the
non-bubble cities were just less comfortable taking risks than the people
in California and Florida. They avoided taking bigger and riskier mortgages even though they could have. Upward price
spirals never really got started there. Mortgage interest rates fell throughout
2001 and 2002 so a huge number of people decided to refinance their homes. When
they switched into lower interest rate mortgages, many people also got larger
mortgages. That way they can get cash out when they refinanced. They ended up with less equity in their
homes but more cash in their pockets. In 2003, an incredible 20% of us
homeowners with mortgages refinance their homes. About half of all mortgages
made in 2004, 2005 and 2006 were for refinancing. Home prices had
skyrocketed which meant people can get huge cash outs, if they wanted to. They could get even bigger cash-outs if they refinanced into
low down payment, subprime mortgages. Unfortunately, they ended up with less
equity which would come back and bite some people when home prices tanked after the bubble burst. As the refinancing boom was ending in 2003,
the subprime mortgage boom really started to take off. And at the same time
subprime mortgages were getting riskier – credit scores fell, down payments fell,
maximum loan amounts rose, fraud rose. Subprime lending standards fell so far
that from 2005 to 2007 the median subprime mortgage had zero
down payment. And by 2006 half of all mortgages were some prime. Some people
chose subprime because they couldn’t get prime mortgages. Others chose subprime so
they could borrow more money. Either way the increase of subprime
mortgages meant people could borrow a lot more money to chase homes, if they
wanted to anyway. Combined with the low interest rates, home prices absolutely skyrocketed in
the bubble cities during 2004 and 2005. On top of this, the Fed began slowly
increasing interest rates in 2004 but instead of slowing things down
people became even more manic about buying homes right away before the low
interest rates were gone forever. Eventually, home prices got so high in
the bubble cities that the market psychology changed from, “These home prices
seem crazy high but they’re increasing crazy fast so let’s buy a home ASAP” to simply, “These
home prices seem crazy high and they’re not increasing crazy fast anymore, so
let’s just wait and see. The spell was broken. And anyway, pretty much anyone with any inkling to
buy a home already had bought one. In 2005, the number of home sales peaked. In
2006, home prices peaked. The spell, however, wasn’t broken for the mortgage industry.
They continued to lower their lending standards in a desperate attempt to keep
the music playing. Many subprime mortgages made in 2005, 2006 and 2007, especially the no money down mortgages,
made it rational for investors to stop paying their mortgages as soon as they realized that home prices weren’t
increasing anymore. If they put no money down, the only money
they had lost was the first few monthly payments they made. The sooner those
investors stopped making payments, the smaller their losses. In 2006, after
home prices stopped increasing, foreclosures started increasing. By 2007,
home prices started to fall and foreclosures of subprime mortgages
started to take off. By 2008, foreclosures of prime mortgages started to take off
and home prices in bubble cities began to freefall. Then the stock market began
to freefall. And then the government stepped in with the first in a series of
huge financial interventions. By the time home prices finally bottomed out in 2012, home prices fallen 30%
nationally, 40% in Los Angeles 50% in Miami and 60%
in Las Vegas. The Great Real Estate Bubble triggered the Great Recession
which turned out to be the deepest and longest recession since the Great
Depression. Here’s why. When the stock market falls,
it doesn’t have a huge impact on the wealth of lower-income Americans, they
don’t own stock. Remember how quickly the economy bounced
back from the 50% crash in the stock market in the 2000 Dot-Com
bubble. When home prices fall 30%, however, it hurts a lot
more people and wipes out most of what little wealth lower-income Americans
have. So consumer spending crashes hard. That’s why the worst recessions, like the
Great Recession, are usually tied to real estate bubbles. I think the money chasing homes
framework does a great job of decoding the chaos of the Great Real Estate
Bubble and even partially explains why during the bust we saw home prices fall in cities that
didn’t even have booms. After the bubble burst, mortgage companies freaked out and
tighten lending standards everywhere. The money chasing homes was reduced everywhere, even in cities that didn’t
have real estate bombs. And currently, the money chasing homes framework helps
explain why home prices are skyrocketing in Vancouver, the U.S. West Coast, Miami and
some techie cities, it’s an influx of foreign and/or tech money
chasing homes in those cities. The first step to preventing another
Great Recession is to understand what caused the Great Real Estate Bubble. I hope this video helped you get a
better feel for what happened If you want more real estate decoded,
please subscribe my website RealEstateDecoded.com. And if you’re watching on YouTube, please
click the Subscribe or Like button. Your questions and comments are always
welcome. Thanks so much for watching! Take care. ticker

About Gregory Ralls

Read All Posts By Gregory Ralls

66 thoughts on “Real Estate Bubble – Explained

  1. There might not be a public consensus but privately everyone knows your scenario is an accurate description of the problem. Too much easy credit and debt. And it's happening again.

  2. Its the federal reserve loaning money out at artifially low interest rates because they can just print more money. and now they think they can fix it by loaning out more. #endthefed

  3. Thanks for the info! You are easy to listen to and explained this well!….This is actually kind of sad. Feels like those in the lower economic categories were prayed on!

  4. Hi John, thank you for great video. What do you thing about housing market in Norway? Do you think that we have a bubble? Do you think that we can have the same senario here in Norway soon?

  5. Ok, I was under the impression this video was covering 2016 data on a possible new bubble developing but it is a discussion on the '07 Bubble…

  6. Most people don't know that the world governments controls almost
    everything. And one of the things the word government is doing is
    taking the private homes. I know this may sound extreme to anyone that
    does not follow the Illuminati (world government). But think it
    through, do you really believe that the people that set up the 2008
    housing collapse didn't know what the outcome would be of these
    decisions made to give a mortgage to basically anyone that walked in the
    door. Of course they new what would happen down the road. All set up
    by the world system, and now there doing the same thing again. So as a
    result you will see another huge collapse in 2017. Again this is all
    set up by the world system, with a plan to eventually most of the
    private homes. Once the banks owns the home then that home is in the
    hands of the world government, because all the banking is owned by the
    world system. Just wait and see the 2nd collapse of the housing market
    is coming.

  7. So with the current price boom in west coast tech cities and Miami, what is your prediction (since it is the tech and foreign money chasing those cities)?

  8. John or ANTONE please give me advise about my situation. I'm a 25 years old guy(no kids) with a 30yr FHA loan that i got in November 2014. I bought it for 150,000 4% and i owe 142,000. i talked to a realtor and when she came to see the house said i could get about 173,000. (house is located in Mesa, AZ) the reason i want to sell is because i plan to start saving and build my credit score again to be ready to buy another house when houses start to go down again. But this time i want and i will get a conventional loan or other options that require a large deposit compare to the 3.5% FHA that i first got. PLEASE HELP.

  9. Hi John, Thanks for sharing your knowledge. I live in VANCOUVER. Is the Vancouver's Real Estate a different story from US housing bubble because very low percentage of Vancouver mortgage are subprime, and new rich immigrants are just keep moving to Vancouver and buying up houses. Could you please share your thoughts on Vancouver RE market? thanks

  10. Hey John! We're thinking of buying a house in St. George, UT and renting it out. Would you recommend it at this time?

  11. Surprising how much of the Great Real Estate Bubble can be explained by basic economics. Check out "expectations" in this video. https://youtu.be/_8T8glylBFc

  12. Hi John, should we buy house (with mortgage) before the crash or wait to buy after crash when the prices fall down a lot?

  13. I think the movie… "The Big Short" explains pretty well why there was a real estate bubble.  Wall Street's hunger for mortgage-backed securities was insatiable, and when they ran out of solid 30 year mortgages to securitize, they got greedy and started adding in more and more sub-prime mortgages (adjustables with teaser rates) into the soup…. and the ratings agencies just kept slapping AAA ratings on them.  I remember getting offers on homes I was listing from Walmart checkout clerks and undocumented-alien landscapers…. trying to buy $350,000 homes.    With sub 550 FICO scores, there's no way the average guy was going to be able to afford his new mortgage payment.

  14. A real estate transaction fails for one of two reasons:
    1. The buyer does not qualify for financing.
    2. The property does not qualify for financing.

    The subprime lenders abandoned qualifying both the buyer and the property. So, of course the loans defaulted.

    By the way, the down payment is irrelevant when the property is qualified relative to the prevailing market rents.

  15. Clicked 'like' and am sharing it with others–thank you. QUESTION: So in Canada… now what? Any thoughts on why type of correction or what would cause it?

  16. Hi John – thank you so much for this incredibly clear and helpful video. A question for you…. a friend just sold their house and got rid of their debt. They are planning on buying something smaller locally, outright, no mortgage. Property near them has gone top dollar as place has become uber cool. I keep saying wait, as I think we are on the verge of another property bubble bursting…. but they think at least their money is in something solid, they will be getting a return immediately and as they won't have a mortgage – that it is safer to buy now even though prices are very likely to drop substantially? They are in it it for the long run – probably at least 10 years – so maybe they are right?! I know you can't give advice – but if you have any opinions on this we'd be very grateful? Many thanks again….

  17. i like the slides and charts. i need to stop the video to look at them but thats great. so i can go into more detail and listen better to every word of you. i really like the first slide explaining house prices …

  18. Awkward video. He starts to speak with his hands before words came out of his mouth. That became a distraction the whole video 🙁

  19. I haven't studied Economics nor visited U.S in my life but I could learn a lot from this video. I think this video is something Chinese citizens should watch RIGHT NOW. Their real estate markets are skyrocketing – rocketing enough to reach Mars. Anyway, it is a great video. Thanks.

  20. No mention of the community reinvestment act? Bill clinton forcing banks to make bad loans by threatening charges of racism and violations of fair lending/anti discrimination laws is what caused lenders to make terrible loans and the terrible loans led to the banks(more out of self preservation than greed) come up with ways to make money off of the govt forcing their hand for political gain. Once the govt stepped in and forced lenders to make bad loans, there was only one ending and that is rampant foreclosures, mortgage backed derivatives, collateralized debt obligations blah blah thats all true but it all started and relied on what built and ensured(and insured!) the inevitable train wreck which was rampant defaults.

    Moral of the story, never elect a democrat, they fck shyt up and obfuscate facts to confuse people and hide the fact that their big govt policies caused the mess to begin with because, without exception, the democrat solution will be more govt regulations are needed to fix the problem that was in fact created by govt regulations to fix some other problem that govt regulations caused. A vicious, predictable cycle that occurs when dems get their fangs into office.

    Community reinvestment act, google it and think logically for yourself and you decide. Why did lenders suddenly to decide to abandon years of lending practices? I guess it magically coincided with the aforementioned CRA? Ya, ok 👌

    The best part is the dems that said "the banks aren't lending to minorities because they are racist" then, after they were forced to lend to high credit risk customers (minorities included) against their will the same aholes now say "the banks prayed on minorities!" Lmfao. The only bigger dults are the special breed of retards that still claim both of these victimhood bs stories! Its astonishing how dumb liberals are, I guess making people feel like victims to get votes for the party that "helps victims" is easier than telling the truth.

  21. Looking to buy in Eugene Oregon and have cash, looks like we'll just rent and wait for the current bubble to pop. Thanks for the video. Any insight on Eugene?

  22. At first when I saw the charts, I thought that it was some technical analysis that completely misses the point. To my surprise, the reasoning is well put and there are some very good points addressed like the economy's dependence on middle income class for strength, resilience and overall sustainability – which a lot of politicians and capitalist with mediocre economic understanding discards in favor of investor money.
    However, this video clearly describes the symptoms of a much deeper problem, that is the efficient market hypothesis and the stupid over-emphasis about investor money which are the reasons for lack of regulation and basically the backbone of current practice of capitalism. The market is never going to be efficient just because the value of all capital assets cannot be immediately determined reliably, that is, investments values are in the future and investment prices determined by pure market fail miserably at capturing the true intrinsic value. Up to a certain point, the overpriced asset will still have some residual intrinsic value to serve as end buyer surplus, but once this surplus is depleted the asset becomes of no real value at the current price, in fact it is a burden to the end user. Try telling that to investors who are still securitizing real estate and creating artificial demand for profits on a good that is no longer beneficial for buyers. They will still speculate and hold on to their assets in hopes of higher prices until someone realises that their asset is overpriced and they should probably sell it now before it starts losing value, either that or a serious liquidity squeeze. What happens then is the most critical part where the market becomes flooded with overpriced assets, prices adjust downward and the heard mentality kick in as all investors dump their assets further aggravating the situation. The house owners then realize that they could also pay way much less for a better house and start defaulting.
    Another aspect which is never discussed is that during the false boom, it becomes more and more economically feasible for individuals to get into the market so they spend money on education, equipment and other related investment derived from the artificial demand on the real estate market, the problem with that is that it creates a huge resource misallocation over the course of many years that cannot be reversed overnight.
    How does all that affect the economy? The answer is: Stagnate, low activity at inflated prices and this is the worst scenario possible.
    The moral is capitalism is not bad in itself, it has many advantages but it can be taken too far. regulation is needed to ensure capital allocation that:
    1- makes investors behave sustainably.
    2- sustains the working class.
    3- does not stray way off intrinsic value or at least long term equilibrium
    4- encourage real value creation instead of borrowing from future capacity (capital gains)

  23. I'm noticing the language about millennials being the next group of buyers. The problem is they have no money saved on average. Combine that with high student loans, I don't see how a sound market can be maintained.

    There is talk of Trump "loosening" lending regulations, which I think will push this current bubble into a much larger bubble that will be pushed further down the road.

    Question, when do you suspect the bubble pops? I'm looking to buy in Philadelphia, but would hate to buy before prices come down.

    I appreciate any thoughts.

  24. How has this become the last, biggest mother of a bubble in the nation?
    Very, very simple answer and the correct answer. 100 percent of the
    cause can be attributed to the locals (mostly feeble minded
    Millennials) copying what the Chinese have been doing.
    Remember the movie The Poseidon Adventure? The ones who followed all
    drowned while the scant few who did the right thing survived. The GTA
    real estate market is a mirror image of that movie and we’re getting to
    the part right before the credits now.

  25. We need trump to deregulate as much of the as possible to encourage reckless risk taking to blow up bubbles. I learned about how markets work unfortunately i was too young to take advantage of the crash. This time I'll be prepared, plz bring on the crash just once more, and make it a huge drop to the bottom, while im still young, I promise to take advantage of it. For everyone else, you would recoup all your losses in 6 to 7 years. I just need this opportunity to catch up to you guys.
    Thanks you Trump.

  26. OMG sub prime borrower nonsense? Nope you didn't come close to what happened and what is still going on today. You didn't event touch on the repeal of Glass Stegall which was done to create the engineered bubble. Unless you explore the securitization derivative scam your not making an honest analysis of the real estate bubble scam.

  27. In a nutshell, first and foremost – debtors are the problem. In addition, banks have no reason not to lend when they know they are going to get bailed out. This results in more reckless lending and further debasement of currency. A lose situation for everybody, and the debtors realise it not.

  28. Well presented, John. Interesting, informative and easy to watch. The housing market in the United Kingdom is currently a complete basket case. A combination of idiotic government policies, buy to let investors and foreign, mainly Chinese gamblers, are creating a perfect storm for housing and the entire economy. I just wonder why more people don't see it? Do we never learn?

  29. The new homes that are being built are garbage and are over inflated by 30-40 % don't trust your real estate agent they are in it for the commission they will tell you that massive amount of people are moving into the area that's hog wash! Ask your self one thing has your income increased enough to afford this garbage that is being built? Answer is no! Interest rates are on the rise and you will see foreclosures will follow when interest rates rise home prices Drop don't be stuck holding that over priced potato sit tight. Investment 101 don't follow the heard

  30. Normal wages are stagnant for years. House prices are 4x, 5x, 6x, the average normal wage. (we are steering down the barrel of a housing bubble here). Property taxes are always going up, food prices are going up, utility bills are up and auto prices are going up. This is insane. How are the powers that be are going fix this situation? Raise interest rates now or raise wages gradually is a must? No, no we can't, they tell us. Too much debt is in the works. Therefore, the system has to correct itself in a brute force manner. When this happens it won't be pretty. Where are the economist and the financial gurus? We need a solution like yesterday or years ago.

  31. U said it right there at 4:40. Speculation. The speculation bubbles have just kept shifting they've never gone away and now mutated with derivatives subprime swaps etc. I mean w.e "expert" thinks we're not in a serious housing bubble now (rental and home prices)let alone global asset bubble in the stock market as well are the ones manipulating and jerry-rigging the market more The subprime financial meltdown just shifted from houses to cars and student loans. Watch how things will look by Christmas…Yayyyy…

  32. The real estate bubble is coming!!! realtor and mortgage lenders are who is acting very irresponsible..home prices are being grossly over priced..the more the realtor sales the home for the bigger the commissions are..florida is so far gone from this..it will crash hard in florida..sace your money people and prepare..prices will crash very hard..then buy!!!

  33. Outstanding video! Thanks!
    Question: If someone in Toronto bought a pre-construction condo at a price they can afford but still a high price, then the bubble bursts before he gets a mortgage, can he still get a mortgage when the value has dropped? This person does not mind paying the high price of the condo because he wants to live in it for 5+ years and expects the price to rise again (above what he paid) in the long term. Would honest buyers be fine in a bubble burst if they are able to pay for the real estate and then wait for it to rise again? Would they not be able to get a mortgage for the original price if the value drops let's say 30-40%?
    Your opinion would be greatly appreciated!

  34. Going forward into 2019 the bubble mentality is on top of everyone's mind. I would like to see inflation adjusted figures from 2000. If you could subtract all the artificial stimulus [ie sub prime] where would prices of been and where would they be today. I think 2008 was an over correction to over valuation, I think the real price cycle and price need to be calculated by leaving alot of 2005-2007 prices out of the equation. So adjusting for inflation where are we compared to 2002?
    Thanks

  35. Fantastic video! I have one suggestion, and that is to leave the charts/graphs on screen for about 50% more time than you do currently, if not twice the amount of time.

    Great video, great presentation, will share and use to educate!

  36. The next Bubble includes the sub-prime lending towards Student Loans; unlike houses, it doesn't have a liquidable value, and cannot be erased under bankrupcy.

  37. Like 2008 housing bubble in USA , due to new brainless president of India is on the way of 2020 or 2022 bursting bubble in 2022 is fixed.And India don't have money for releive from that bubble and then I the end indian pls will bcwme begger in 2022 , this is scary.As you can see overall indian economical chart , India is on the way of became bankrupt in 2022 thatis fixed.And due to bankrupcy in India , no other countries will effect from that burst.And at the end world bank wont provide more loans from world bank due to from last 30years. and then oike now 70% ppls are jobless and after 2022 indan ppls will 100% become jobless and banks will shutdown and indian ppls will become refugees and won't get 1 time food for 1 day.India is on the way on crisis if they won't change his president.Else indian ppls on the way of fire on the bankrupcy.
    This economical charts are not good for Indian ppls.Higher taxes are booming in India after introduction of gst slabs.And also no one will save India after bankrupcy because indian ppls are corrupted ppls , actually India is not democratic country it is combination of corrupted ppls and corrupted indian government.Whre corruption will increase , that country will become either bankrupt or hotspot of weapon testing centre like Syria.For natual resources.

  38. Thanks. I’d still like an explanation on how the real estate bubble is connected to the stock market and the role the traders and Wall St. played. Are they the “investors?” I don’t really understand. Is it all the mortgages the Wall St. traders were buying from banks? I’m lost.

  39. With student loan bubble, Corporate loan bubble, housing bubble and Stock Market bubble, Big National Debt, Trade war with China/Mexico now in 2019, it will be worse than 2008 recession coming soon. You can see it in Fed Reserve Chairman's face.

  40. And here we are in 2019…. real estate bubble round 2. Care to give an update and share your opinion on current money chasing houses? 😎

Leave a Reply

Your email address will not be published. Required fields are marked *