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    Real Estate Bubbles

    School sucked. I have never in my life used the quadratic formula since I learned it 10th grade math.

    It’s too bad school didn’t teach us more… like how to do our taxes, how to create a budget and follow it and oh yeah… how the real estate market worked. Now were adults and its like “Oh yeah, I’m supposed ot buy a house because… thats what people do, right?”

    A huge part of feeling comfortable buying a home is understanding what conditions you are buying it under. No one would purchase a home if they knew the housing market and the value of their home was going to shoot down. And most people if they were able to, would purchase a home if they knew the market and the value of their home was going to shoot and create instant wealth. But people are busy and don’t have time to give much time to think about this kind of stuff and never learned what metrics to look for.

    The truth is, every second you spend not owning a home, you are throwing money away renting. So the question is, is it easier to avoid thinking about it or is it smarter to get a pulse on the market, find out how you can create wealth from real estate and take control of your future? Hopefully this will help in your pursuit.

    How are prices established?

    The price of housing, like the price of any good or service in a free market, is driven by supply and demand. When demand increases and/or supply decreases, prices go up. Prices rise because demand outpace current supply.

    Some indicators that increase demand include:

    • Greater economic prosperity characterized by more disposable income and an encouragement of home ownership
    • An increase in the demographics entering the housing market
    • Favorable interest rates that make borrowing money cheaper
    • Favorable loan programs that give access to home ownership with less money down
    • Less strict credit and underwriting standards

    All of these variables can combine to cause higher prices. They tend to feed off of each other. In general, more prosperity gives more people money to spend on a higher quality of life.

    But at what point do rising prices become dangerous?

    Forces that Burst a Bubble

    A bubble bursts when the supply of housing increases while demand decreases that results in the fall of home prices.

    Pervasiveness of risk throughout the system is triggered by losses suffered by homeowners, mortgage lenders, mortgage investors, and property investors. Those losses could be triggered by a number of things, including:

    • A downturn in general economic activity that leads to less disposable income, job loss and/or fewer available jobs, which decreases the demand for housing
    • An increase in interest rates that makes home ownership unaffordable for new buyers in the market or unsustainable for homeowners with adjustable rate mortgages (ARM)
    • Increased number of defaults, foreclosures or short sales because homeowners can no longer afford the payments on their home
    • If homes prices rapidly depreciate in a short amount of time, speculators may lose money and more homes saturate the market

    When loses mount, credit standards are tightened, easy mortgage borrowing is no longer available, demand decreases, supply increases, speculators leave the market, and prices fall.

    The Bottom Line

    Is now a good time to buy? That depends on where you are reading this. And my answer may change. But in general, prices in Utah unquestionably have increased over the past decade. I believe this is due in large part to an increase in economic prosperity as characterized by growth in population, jobs, infrastructure, technology and manufacturing. This has also been fueled by favorable borrowing conditions for buyers with low interest rates and little to no down payment programs available.

    Every local economy will be affected in some way by a national or worldwide economic downturn. But because Utah has grown more than almost every other state in the country in productivity and jobs, it is likely to be insulated more than other states that rely more on tourism and attractions that will be highly affected during an economic downturn.

    Comment below what jobs and industries are driving your economy, and tell me something about your area that you think is interesting to know!

    -Brett

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