How to Spot the Next Real Estate Bubble

Spotting the next real estate bubble is a tricky thing to do. If it were possible, people would be better at avoiding when the bubble pops. In order to spot the next real estate bubble, it is important to first know what it is. A real estate bubble is an increase in housing prices that is fueled by demand. Housing bubbles typically start with an increase in demand, while there is a limited supply. The cycle takes a long period of time to replenish and increase. A few ways to spot the next real estate bubble is to pay attention to the media, note when homeowners can no longer afford to buy their homes and when investors can’t find property at low prices.

The Media

When the real estate market was booming, it is all we heard about in the media. There were television shows about flipping houses, commercials that showed you how to get rich with real estate and books were published about the glories of owning property. A bubble mentally is hidden well within media hype. It is important to examine the real estate market as a whole and know that real estate prices go up and down. If the media is publicizing real estate, chances are we are in a bubble or approaching one soon.

Homeowners Can No Longer Afford Their Homes

Another way to identify a bubble is if a homeowner can no longer afford to purchase their own home. For example say someone purchased their home 10 years ago at $125,000. Today, they find out their house is worth about $475,000, which is over a 200 percent increase in value. However,  the homeowner’s household income only rose by 30 percent. In essence, the same family that purchased the house 10 years ago would not be even remotely close to affording their house in the current market.

Investors Can’t Find Property

Another sign of a bubble is when investors aren’t able to find properties at prices that offer cash flows. When investors pay $350,000 for large complexes that only generate $25,000 a year in gross rents, it’s not investing, it’s speculating. In this scenario, the rents are not enough to cover the mortgage and expenses. The only reason people pay those prices is with hope that someone will come along and pay a higher price. This is the result of a market where homeowners no longer provide buying support because they are "priced out". In turn, investors no longer provide buying support because they are also "priced out".

When it comes to a real estate bubble and purchasing real estate, the amount of risk you take is your choice. As a result, you should focus on motivated sellers so you can buy extremely low. Focus on buying small multi-unit properties or buy outside of your area where properties offer a positive cash flow.

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