The news is full of headlines about possible “real estate bubbles.” Given what happened during the Great Recession, this is understandable. Buying property is a significant investment, and no one wants to see the value of their real estate take a nosedive. But a real estate market bubble is not something that happens overnight. The following are three significant warning signs to look out for when investing in property you think could be in a market that may be “on the bubble.”
Rising interest rates
According to Investopedia, one of the worst things that can happen to a real estate market is a major upswing in interest rates. Not only does rising interest rates make buying a home increasingly unaffordable for new buyers, but higher rates can also make a home that’s already owned unaffordable. This is what happened during the Great Recession when low introductory rate mortgages suddenly spiked, and the new owners were unable to pay the interest rates, leading to mass foreclosures. It’s estimated that trillions of dollars in home value were lost.
Home prices rising too quickly
Another dangerous sign is when home prices rise so quickly salary growth cannot keep pace. This is an issue in many parts of the United States, with Forbes revealing that The NAHB/Wells Fargo Housing Opportunity Index, which scores homes from 0-100 based on relative affordability, scores the market at 56, meaning that only 56% of homes sales are affordable. Compare that to the score back in 2012, which was 78. However, it depends on the market, with those that can add affordable housing more likely to grow over time, making them less susceptible to a bubble.
A decline in demand
Another important warning sign, according to Mansion Global, is excess inventory. When supply outweighs demand, homes have a harder time getting sold and sit on the market longer. At this point, prices start to fall, and this could point towards a serious downturn in the market, although often price declines are small and they bounce back quickly. Still, this could be a sign the market’s health is starting to suffer.