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 the 10 years after the bubbles 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 now how much money part measures demand and the how many Goods part measures supply it turns out this simple form which 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 call inelastic supply most products are kind of like iPhones if the new iPhone is a hit grade Apple mixes 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 their 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 would 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 2 factors determine how much money is chasing homes how much money people have and how much money people can borrow and two huge factors in 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 gray real estate bubble mortgage companies became a hell of a lot looser with their money they loosened up slowly at first but then faster and faster and crazier FHA became looser 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 at 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 in a recession began to pump up the economy the Federal Reserve lowered interest rates drastically interest rates on 30-year fixed-rate mortgages fell three 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 percent more money in 2003 compared to 2000 if you switch to an adjustable rate mortgage you could borrow sixty percent more if you switched to a subprime mortgage you could borrow even more Los Angeles for example already had a really tight real estate markets 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 increased even more with the rapidly rising home prices subprime mortgages became more popular because people wanted to borrow more money and more people wanted to borrow everyone was talking about home prices It was as if the dot-com mania 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 that most US cities did not have real estate bubbles homebuyers and 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 tight 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 in Florida they avoided taking bigger and riskier mortgages even though they could have upper price spirals never really got started their 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 could get cash out when they refinance they ended up with leslie equity in their homes but more cash in their pockets in 2003 an incredible 20% of US homeowners with mortgages refinanced their owns about half of all mortgages made in 2004 five and six for refinancing home prices had skyrocketed which means people could get huge cash house if they wanted to they could get even bigger crashes if they refinanced into low downpayment 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 a 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 subprime 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 do anyway combined with the low interest rates home prices absolutely skyrocketed in the bubble cities during 2004 in 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 studies that the market psychology changed from these home prices seemed crazy high but they're increasing crazy fast so let's buy a home ASAP – 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 beat 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 6 & 7 especially the no-money-down mortgages made it rational for investors to stop paying their mortgages as soon as they realize that home prices weren't increasing any more if they put no money down the only money they had lost was the first few monthly payments they made this 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 had fallen 30 percent nationally 40 percent in Los Angeles 50 percent of Miami and 60 percent 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 calm bubble when home prices fall 30% however it hurts a lot more people and it 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 it even partially explains why during the bust we saw a 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 booms and currently the money chasing homes framework helps explain why home prices are skyrocketing in Vancouver US 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 real estate Dakota comm 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 you

45 thoughts on “Real Estate Bubble – Explained

  1. 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.

  2. 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!

  3. Hi,any thoughts on what’s happening to real estate in Sydney ,Australia? Any feedback would be appreciated

  4. 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

  5. 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!

  6. 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!!!

  7. 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…

  8. 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.

  9. 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

  10. 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?

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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)

  17. 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?

  18. 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.

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

  21. 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 …

  22. 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….

  23. 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?

  24. 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.

  25. 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.

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

  27. 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

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

  29. 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

Leave a Reply

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