With all the press on housing bubbles, we thought we would clarify a few things. In the past, the home-building industry has been prone to two types of housing bubbles: 1) Price Bubbles and 2) Supply Bubbles. 1. Price Bubbles generally occur in the expensive, supply-constrained markets, such as California and the Northeast. Builders in these markets can't meet demand, so surges in demand tend to result in years of rapid price acceleration. The price acceleration often becomes too rapid because home buyers and investors incorrectly assume that what happened last year will happen in perpetuity. Price bubbles can be fueled by declining mortgage rates, which is what The Wall Street Journal and others have been warning about for years. 2. Supply Bubbles generally occur in the inexpensive, supply-plentiful markets, such as Arizona, Atlanta and parts of Texas. In the past, builders in these markets have grown their businesses too fast during strong economic times, eventually resulting in ove...
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