The most recent real estate bubble burst between 2007 and 2008, under the weight of a market saturated with overpriced properties and subprime mortgages. Unfortunately, this bubble likely won’t be the last. When real estate values again spike to unsustainable levels, will you (and your clients) be prepared? What methods should real estate owners and investors use to establish accurate values for their properties before a bubble and what issues should they be prepared for if properties fall into bankruptcy?
2007-2008 Real Estate Bubble Background
A significant financial spur to the housing bubble was a sharp drop in mortgage rates. The average fixed rate mortgage declined from 8.0 percent in 2000 to 5.5 percent in 2003. Since typical home purchasers target a price range based on monthly mortgage payments, this decline in mortgage rates enabled them to borrow 25 percent more at the same monthly cost. In 2000, the 20-city average housing price index compiled by S&P/Case-Shiller rose by over 12 percent. In July 2006, housing prices had increased by 65 percent and began a slow decline that quickly gained momentum and was further impelled by the October 2008 stock market crash. By January 2009, housing prices had declined by almost 30 percent.
