As a result of the real estate bubble, the number of homes being built, decrease. There is a huge inventory of unsold houses in most countries so developers are experiencing a major downturn. Homeowners are struggling with warning signals of potential foreclosure on their homes… and that is just the tip of the iceberg. Housing bubble, which refers to the residential real estate market, lingers in so many countries including the United States, some parts of Europe, and Asia. The crisis in the United States started in 2005 and it has not yet bottomed as of date.
How did the bubble start??
There was a remarkable 64% increase US homeownership in 1994, which peaked in 2004 to 69.2%. This increase in the trend sparked up the industry. Housing prices and consumer expenditure increased from 1997 to 2006. Since values of the prices increased, homeowners used their homes to refinance at lower interest charges. Consumers were encouraged by the government to go out and shop.
When the industry boomed, developers built a lot of real properties, which contributed to the large inventory of new homes yet to be sold. With so many surpluses, the values of homes decreased. People refused to sell their houses at very low prices. Most of these owners too, have reached the negative equity level, which makes it even harder for them to avoid defaults on their mortgage loans. In terms of number of units, sale of new homes decreased to 26.4% in 2007. By the start of 2008, a record-breaking 4 million existing homes went up for sale in which almost 3 million are vacant homes.
Excess supply of homes made a huge impact on the prices. 10.4% from December 2006 to December 2007, and a whopping 15.8% come May 2008. The trend is expected to continue until all excess homes reach the normal or typical level.
In the United Kingdom, building of houses took a halt as the number of new houses being built went down 60%. This is due to the fact that financing companies have implemented new and tighter policies on mortgage lending to buyers.
Based on the data presented by the National House Building Council, there is a significant 56% drop in the number of houses being built from May 2007 to May 2008 in the private sector. Owing to the building activities of their 20,000 registered developers, there was close to 15,800 houses in 2007 versus around 6,900 this year.
The same trend is happening to social housing projects in the public sector where there is a good 60% decrease in home building - the numbers being over 4,300 in 2007 and lose to 2,700 in May 2008.
Lenders are increasing their fixed-rate packages from 6.49% to 6.99% so, on a home loan of 150,000 pounds (about $279,000), there will be additional monthly payments of 47 pounds or roughly $87.
The ripple effect of the housing bubble to an entire economy is a reality that happens periodically. Real estate could be considered a speculative market in that it is always difficult to assess a possible crisis by hindsight. You would only know about the crisis when it already is happening.
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