A housing bubble can be disastrous to real estate investors. The combination of increased demand and limited supply often attracts novice speculators who believe they can make significant money in the short term. Their activity does serve to increase demand somewhat, but at some point, demand will decrease or stabilize as the supply of available houses increases. This leaves many investors with unsold inventory when the bubble bursts and no hope of recouping the money they have invested in the near future. A housing bubble can leave investors selling for a loss or sitting on empty houses for years before the market comes back.
Are we entering a housing bubble?
In his recent article for Forbes, Lawrence Yun, chief economist for the National Association of Realtors, addresses concerns many people have about rising home prices as the market recovers from the Great Recession. He notes that prices in some parts of the country, such as Dallas and Denver, have risen beyond their previous peak levels and increased by as much as 20 percent. Nationally, prices are increasing 3 and 4 times the average growth rate for wages. Perhaps the most important change is that the average credit score for approved mortgages in January 2016 was 719. That is well below the average of 730 to 740 noted last year.
Boom or bubble?
Despite the rise in prices, there are some key differences in the current housing market and the run-up to the market collapse. New construction is still moving at less than half the pace it was in the first few years of the new millennium. Despite prices outpacing income, people can now afford a house more comfortably thanks to lower interest rates. Finally, the easing of strict lending parameters is nothing compared to the wild times of rampant subprime mortgages, adjustable rate loans, and stated income loans.
Identifying a bubble
Bubbles occur when mortgage financing expands too rapidly and flipping activity increases in your local area. After all, regardless of what economists have to say about national prices rising on a compounded annual basis or inflation-adjusted numbers, your local market is what really matters to you.
Always remember that nobody has to purchase a home. It is a want-to-have item. Renting has many benefits, and the dream of home ownership holds less appeal to millennials than it did for previous generations. To avoid being caught in a housing bubble, understand that the past is not always an indicator of future activity. Be prepared to adapt to market fluctuations, and understand your target market of renters or purchasers.
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