Some experts say that America is close to another housing bubble — one that could lead to economic catastrophe.

According to a recent Forbes article, U.S. home prices are up 19.2% over the past 12 months. However, economists fear the reign of the hot housing market may soon be coming to an end.

George Ratiu, manager of economic research at Realtor.com, recently said, “We’re not in a housing bubble just yet—but we’re skating close to one if prices continue rising at the current pace. Some markets will see a correction if mortgage rates continue to rise, in which sales will drop and prices will follow.

While he doesn’t see a “huge crash or spike in foreclosures,” others aren’t so sure.

Federal Reserve Bank of Dallas Economist Enrique Martínez-García said, “The housing market has become bubbly.”

In a recent report, he and other economists found signs of a housing bubble in the real estate market.

That report indicated there’s concern that U.S. housing prices are “becoming unhinged from fundamentals.” That means people are paying far more for homes than the property is actually worth.

For example, the average sales price of a house in the U.S. was $477,900 in the fourth quarter of 2021, the St. Louis Fed estimates. Statista estimates that the average new home sales price rose from $391,900 in 2020 to $267,900 in 2011.

 

Will the Housing Bubble Create a Financial Crisis?

A sudden rise in home prices preceded the Global Financial Crisis of 2007–2008. The average U.S. home price rose from $207,000 in 2000 to $297,000 in 2005, Statista estimates.

Recent housing price increases are larger and faster than the price growth before the last financial crisis. The last housing bubble ended with a sudden collapse of the financial markets.

The last financial crisis occurred because home prices exceeded the properties’ true values. One result of those prices was the mortgage crisis, in which mortgages were far larger than the home’s value.

This created thousands of what real-estate pros call “underwater homes.” A home is underwater when the sales price can’t pay off the mortgage. Underwater mortgages can trap owners who can’t cover payments, such as the unemployed. While they can’t pay their mortgages, they can’t sell their homes either.

During the financial crisis of 2008, many people stopped paying their mortgages and abandoned their homes because they couldn’t sell the property or pay the mortgage. When analysts realized that thousands of mortgages were being neglected, financial institutions collapsed.

 

Speculation is Driving the Housing Bubble

Today, home prices are rising faster than in the last housing bubble. One reason is due to the fact that ordinary people are not participating in the home-buying frenzy.

Instead, investors and speculators, some of whom are foreign citizens, are buying the homes, hoping to flip them quickly. For example, The Orange County Register estimates investors comprised 51% of Southern California home buyers in December 2021.

Such speculation is dangerous because investors will pay a far higher price for homes than ordinary people. The Orange County Register estimates the median price Southern California investors paid for a home in December 2021 was $898,000.

The housing bubble could collapse fast because speculators usually cash out quickly when prices start falling. All it will take is a sudden sell-off by a few speculators in a market such as Southern California to burst the housing bubble.

 

Could the Housing Bubble Burst Boost Gold?

A sudden housing bubble burst could boost gold prices. Gold prices rose after the last real estate bubble burst.

According to MacroTrends, the price of a troy ounce of gold rose from $959.05 in May 2006 to $1,303.51 in March 2008. Gold prices kept rising to a high of $2,315.93 in August 2011.

In contrast, the St. Louis Federal Reserve estimates that the average U.S. house price fell from a high of $322,100 in the first quarter of 2007 to $259,700 in the fourth quarter of 2011.

History has shown that gold retains value when a housing bubble bursts, while homes don’t. As we know, history tends to repeat itself.

People who think their homes will protect their wealth from the economic chaos of a real estate bubble and a financial crisis may want to have something else in their back pocket.

Homes will lose value, but gold can retain value. If you want to protect your family’s wealth from a housing bubble, think about investing in gold and other precious metals.

Let us help you with that by providing a free, no-obligation, one-on-one consultation. Our account executives will answer all of your questions and help figure out which option is best for you!

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