Real estate bubbles are quite common nowadays and these are never good for the industry. A bubble happens when the prices of the properties suddenly increase, instead of rising gradually. This increase is very unhealthy and when this bubble bursts, the prices rapidly go down too, without fair warning. The bursting of the bubble can cause significant damage to the real estate market and is often followed by a recession.
As of the moment, it is hard to identify whether the current state of the real estate market is on a bubble or just booming. But whether the industry is on a bubble or not, the increasing cost of the housing prices have encouraged a lot of individuals to take risky debts. The trend these days has been fueled by decreasing interest rates, making the more expensive house quite affordable for the crowd. But the downside is, these buyers are more prone to taking financial risks like getting long term mortgages (30 years and the like), variable rate loans, second and third mortgages, and those deals that surpass the actual value of the property. Can you see the problem here?
In general, how can this real estate bubble affect people? Well, the first rule in housing expenses, including taxes, interest and all that, should not exceed 25% of a person’s gross monthly income. In the past few years, there have been reports that most of the families are paying more or less, 50% of the gross income for housing alone. This is totally not good, especially to the paying party.
People are paying too much on housing alone, they are then forced to use credit card in order to pay for their other needs, like food and miscellaneous expenses. At first, they might not notice the financial problem they currently have, but they should have a reality check. If they look more closely, they will see that they are spending too much on interest rates on credit cards and others, and paying for things in a longer period of time.
So, how can you insulate your home value against market bubbles? There are a number of ways that people can follow to protect themselves against bubbles and similar situations. Of course, the very first helpful tip is to avoid buying a house or property that you can’t afford. There might be houses on sale that seem to be very good investments, but do not be fooled. It is best to settle for a home with a traditional mortgage and with a fixed interest rate. Also, the housing cost should only be between 25-32% of the family’s gross income. Through these simple ways, you can avoid what they call as the “bubble trouble”.
In general, choose a modest home, nothing too fancy for your income. It is best to stay on the safe side, rather than having a luxurious home that you can’t afford. Don’t panic when there is a possible real estate bubble, and go on with caution when it comes to purchasing a property.