Blog

Welcome to the BeSmartee blog. Enjoy a wide selection of articles related to mortgages, the industry, and real estate.

The Recent California Real Estate Bubble

By Arvin Sahakian · Jul 29, 2015 · Real Estate Data

The Recent California Real Estate Bubble

Image courtesy of Flickr, Nick Webb

Throughout history, real estate bubbles have formed and burst in cycles that often fall within the same decade. Many see their investments rise in value, only see them fall again. Learn what occurs before, during and after a real estate bubble bursts.

It seems that a recession can come out of nowhere, then, after months or years of limping along, the economy recovers. After several years of recovery and growth, it all happens again. These occurrences of growth and contraction are known as an economic cycle.

At the beginning of growth cycle in the economy, investing in real estate becomes very popular. Property sellers see a chance to make money by increasing the sales price of their real estate properties. Buyers see real estate as a great opportunity and decide that the higher prices are justified because they can only go higher.

What is a Real Estate Bubble?

A real estate bubble is a period of time when the value and prices of purchasing properties increase rapidly due to an extraordinary demand from buyers who are willing to pay the higher prices. The longer the strong demand lasts, the higher the prices will go.

Recession Following The Real Estate Bubble

After multiple years of growth and rising prices, there comes a point at which buyers realize that the price of real estate is overvalued and are either unwilling to make an offer or do so at lower than asking prices. As this becomes the norm, the unraveling of the real estate bubble begins and prices start declining rapidly. Typically this is known as a "correction," in the short term, and known as a "recession" when it lasts more than several months. Rapid reversal of prices can lead to homes going "under water."

For Example

  1. You purchase a property before the onset of a real estate bubble with a $200,000 loan.
  2. After 5 years, during the height of a real estate bubble, your property is worth $300,000.
  3. At the beginning of the 6th year, the real estate bubble bursts and demand for real estate dries up.
  4. By the end of the 6th year, prices have declined and your property is worth $175,000.
  5. You're now considered "under water" on your mortgage by approximately $25,000.

The issue with under water mortgages across the nation were one of the key elements that gave rise to foreclosures. This further reduced the decline in real estate prices and contributed to losses with the lenders for those mortgages, negatively impacting the overall economy. This is a simplified explanation at how the bursting of a bubble can cause a "ripple effect" throughout the economy.

Take notice of the chart below. As real estate prices started declining rapidly after 2006, the rate of foreclosures started increasing rapidly well into 2009, which is when the decline in real estate prices reached a bottom.

U.S. Property Foreclosures From 2000-2014

Historical Real Estate Sales Prices (2000 - 2014)

Let's take a look at a 14 year snapshot of median sales prices of single family homes within four major counties in California. Take notice of how the County of San Francisco has recovered beyond the height of the bubble in 2006, where as the other counties have not recovered quite as well.

San Francisco is experiencing a growth with companies in the technology sector (such as Facebook, Twitter, AirBnB, and Uber) expanding their businesses, which bring with them an influx of new, well-paying employment opportunities. As you view the graph below, pay particularly close attention to the following years:

  • 2000 (height of dotcom bubble)
  • 2006 (height of real estate bubble)
  • 2009 (bottom of housing market)
  • 2014 (current state of recovery)
U.S. Property Foreclosures From 2000-2014

Historical Mortgage Rates (1984 - 2014)

In 1984, the fixed mortgage rate was a whopping 13.88%, while in 2014 the mortgage rate was 4.17% as outlined in the graph below. Thirty years ago, inflation was at an all-time high which caused interest rates to be high as well, but for the last decade or so, interest rates have been low enough that most people with a reasonable down payment can afford to purchase a home.

The most recent real estate bubble had its approximate beginning in the year 2000, at the peak of the " Dotcom Bubble." This was the year where interest rates started declining more rapidly and underwriting standards became less restrictive. Meanwhile, specialized mortgage financing programs, such as subprime loans, were heavily promoted by lenders to include more buyers and mortgage borrowers that would have otherwise been left out of the market had these programs not existed.

U.S. Property Foreclosures From 2000-2014

Historical Rates of Home Ownership from 1965 – 2014

The rate of home ownership refers to the percentage of homes in the U.S. that are occupied by the owners themselves. This data is one of many tools used by professionals and investors alike to try and predict what way the real estate market will be heading in the future based on the historical data from the past.

The chart below will show you the rate of home ownership from 1965 to 2014. When the U.S. Census Bureau started keeping data on home ownership rates in 1965, approximately 63% of households in the U.S. were occupied by the owners. By the year 2004 (arguably the height of the pre-financial crisis housing bubble), home ownership had reached its peak at 69%. This figure has been in decline ever since. As of 2014, our current rate of home ownership stands at approximately 64.50%.

Average Rate of Home Ownership From 1965-2014

Many speculations swirl around as to why home ownership rates are declining again. There are some who speculate that underwriting standards with lenders are much more difficult and restrictive than the pre-crisis era. There are others who speculate that the influx of cash buyers (such as large institutional buyers and small investors) made it difficult for the average consumer with a 3.5% - 20% down payment to compete with on prices as they were limited in capital resources. Yet there are others still who speculate that the decline has less to do with income and qualifications of the buyers but more to do with lifestyle choices and living preferences.

Best Practices When Purchasing Real Estate During a Bubble

Purchasing real estate is not a no win situation in spite of the danger of a real estate bubble bursting. Before making a purchase, it is important to investigate similar properties in the area to avoid overpaying. This is one of the reasons why having an experienced real estate agent is important.

It will also help to have a sizeable down payment when purchasing a home. A 20% down payment will help you avoid additional costs for mortgage insurance and ensure you have enough equity in the home to avoid being "under water" if and when a real estate bubble bursts.

In addition, keep track of interest rates and property values after you have purchased or refinanced your home. Rates can become low enough to be advisable to refinance your existing property, or purchase that second home or investment property you have been considering.

What Goes Down, Should Come Up

Historically, real estate bubbles can occur and burst within every decade, with the most recent one causing an economic recession. After a few years the market not only recovers, but the price dramatically increases, as we are currently experiencing. If you want to participate in this market and make an investment, ensure that you fully understand what you are getting involved with, and ensure that you can survive the ups and downs of the market without suffering personal financial setbacks.


Real Estate Commission: Explained, Revealed and Compared
By Arvin Sahakian · Aug 17, 2015 · Real Estate Data

Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article. Read more.

197,754

California Property Tax: Complete List by County 2014-2015
By Tim Nguyen · Nov 26, 2014 · Real Estate Data

List of secured property tax rates for all counties of California fiscal year for 2014-2015. Read more.

126,877

California Proposition 60 and 90: Your Complete Guide
By Tim Nguyen · Nov 28, 2014 · Real Estate Data

If you live in California and are over the age of 55 you can effectively reduce your property taxes when buying a new home. Read more.

66,429

What to Expect During the Home Loan Closing Process
By Arvin Sahakian · Feb 24, 2015 · Mortgage

You've heard the term used before, but what does loan closing mean? Find out all you need to know about the process. Read more.

54,323

The Surge in Foreign Real Estate Investment in the United States
By Laura Agadoni · Feb 24, 2016 · Real Estate

Foreign real estate investment in the United States, both commercial and residential, is a huge phenomenon that is only expected to accelerate, maybe even to skyrocket, in 2016. Read more.

50,353

Houston vs. Dallas: Which One is Better to Live in?
By Amanda Curry · Oct 11, 2016 · Real Estate

Houston Vs. Dallas? If you are considering moving to either of these major metropolitan areas, we've created a resource to help you make the decision process a little easier. Read more.

49,159

5 Illegal Borrowing Activities: Things That Are Illegal When You Try to Get a Home Loan
By Laura Agadoni · Jan 22, 2016 · Mortgage

Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud. Read more.

48,460

Does Homeowners Insurance Pay Off your Mortgage if the House is Burned Down?
By Amanda Curry · Feb 8, 2017 · Mortgage

In this article, we explore how homeowners insurance works and what happens in the event of a house fire. Read more.

25,892

16 Ways to Improve Your Debt-to-Income (DTI) Ratio
By Veronica Nguyen · Nov 29, 2014 · Mortgage

Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips. Read more.

25,356

5 Tips on Getting a Mortgage Loan after Bankruptcy
By Veronica Nguyen · Apr 15, 2015 · Mortgage

A bankruptcy will make it very difficult to attain a home loan. These 5 tips will help you re-establish your credit quickly in order to qualify for a home loan. Read more.

20,793