You can’t deny that there has been some murmuring about bubbles and crashes in the real estate market over the past couple of years. And by murmuring, we mean that super loud whisper that grandma tries to do when she’s talking smack about the neighbor who is ten feet away and can hear every word she says.
Signs, Signs, Everywhere Are Signs
In 2017, Forbes reported that 83 percent of people thought it was a good time to sell and 58 percent thought there would be a housing bubble price correction in the near future. These people may be seeing some of the warning signs that were present before the last big crash in 2008, such as:
An asset bubble happens when the price of the asset climbs for a period of time and then rapidly declines. In this case, the asset is housing. When you put the prices on a chart (like the folks who maintain the S&P/Case-Shiller National Home Price Index do), it makes a bubble shape, hence the term. As sexy as those curves may seem, a bubble does not always bode well for real estate investing. Housing prices have been climbing since 2012, which makes some people loud-grandma-whisper that another crash is coming. But you know, grandma doesn’t always know best.
Mortgage rates affect buying habits because higher rates naturally make it more expensive to buy a property since the buyer is paying more in interest. One sign of a bubble is an increase mortgage rates. This trend tends to slow down sales, which contributes to lower housing prices, which leads to even slower sales, which obviously means that WINTER IS COMING! Kidding. It’s just one possible indicator that the real estate market is cooling.
Analysts also pay attention to who is buying houses. While it’s difficult to get hard data on this, you can spot the signs by following real estate media and looking for trends. When the flipping market is on the rise and when foreign investors start scooping up properties, we might be in the midst of a bubble.
Interpreting the Tea Leaves
Here’s the thing: Although we can look for signs, it’s almost impossible to predict a bubble when you’re actually in it. It’s only after the bubble bursts that it becomes real. Until then, it’s tricky to tell if the bubble—if it exists at all—will continue to grow or if the market will just stagnate. When looking at the signs and trying to predict whether 2008 will repeat itself, it’s also important to remember what isn’t there.
Home Prices Versus Income
Housing prices have gone up faster than incomes have, which means fewer people can afford to buy a home for the first time compared to 2008. This trend, along with huge amounts of student loan debt, helps keep demand down and may slow down any signs of a bubble.
Man, that feels like a dirty phrase. Subprime mortgages were a major contributor to the 2008 housing market crash, but we seem to have learned a lesson from that mistake. These types of loans still exist, but they make up much less of the market share. In some programs, borrowers have to attend a homebuyer class and meet with housing counselors. Also, importantly, unlike the subprime mortgages of the mid-2000s, these loans are not going to investors.
Flippers Get Less Financing
This particular change might have affected you as a real estate investor. Before the last crash, lenders were financing 80 percent or more of a property for people who intended to flip it. That percentage has dropped to 55 percent, putting more of the financial burden (and the risk) on flippers. These tighter lending practices help maintain the balance between investors and people who plan to live in the homes, reducing the risk of a bubble.
You Can’t Read the Leaves without the Tea
Bubble, pricing correction, crash … No matter what is about to happen, you can’t prepare for it without having valuable information at your fingertips. If a bubble is indeed approaching, you can prepare for it by investing wisely. The market might be hot right now, but be careful not to overextend yourself. If the bubble does burst, you can be ready for it with quality REI software that helps you identify potential deals and increase efficiency, no matter what the market holds.
If you’re worried about the real estate bubble potentially bursting, take advantage of the hottest real estate markets to find your next target area for real estate investing, and prepare for your next steps if the tides change. For example, Pittsburgh offers the best bang for your buck if you’re a flipper, and Panama City Beach in Florida is the place to be if you invest in rental properties. No matter what happens in the market, the REI professionals who stay on top of their homework and use the best available tools are the ones who come out on top.