The real estate market is sometimes characterized by unstable behavior. There is an increased demand for real estate properties in the face of limited supply. Prices often soar to high levels at this time. Speculators enter the market, further driving the demand. This state is called a real estate bubble. At one point of time, supply increases and demand decreases. The prices then come down automatically and the bubble deflates. A real estate bubble is not good for buyers as it results in losses. Buyers end up paying more for a property than it’s worth and end up selling for less. So buyers have to learn how to sense a bubble. Here are 5 signs of one as reviewed by DC Fawcett.
- Interest rates When interest rates are lowered, the demand for properties increases. This results in a bubble. Buyers have to look out for a reduction in interest rates. When the interest rates rise even by 1%, the demand comes down and the bubble bursts.
- There is lots of leverage When you take a long-term financing loan, you are actually leveraging your money. The more you pay down cash, the less you are leveraging your money. When the demand for houses increase and the prices soar, there will be more leveraging of money. This increased leverage may be a sign of a bubble as generally in the United States, 45% of transactions are made by paying down cash.
- Prices of houses soar faster than salaries When home prices escalate faster than incomes, then there can be a fizz in the local market. Investors must watch out for this sign. They can consult real estate agents regarding this. Some real estate agents calculate the average income level and employment level and compare it with the price rise for instability.
- Reduction in foreign demand Reduction in foreign demand slows down the international market. Due to decrease in foreign demand, international market prices will soar and this can be a bubble.
- Risky loans
When risky loans are lent, it may be a sign of a bubble. When the market prices soar, more loans are borrowed. An increase in subprime loans and loans with bad credit can be seen during times of bubble.
It’s difficult to identify bubbles. It does not mean that there is a bubble just because there is a price appreciation. A bubble is said to have occurred when there is a price appreciation without the support of factors that drive the value of real estate property. For example: San Fransisco, California is not in a bubble just because prices are high. However these 5 signs towards identifying a bubble have to be watched out for.