Real estate prices have been rising, for nearly 10 years straight in America. Whether you want to buy a brownstone in Brooklyn or a single family home in Compton, you’re going to pay a lot more than you would have a decade ago. There are some real estate investors who say that continuously rising property prices only lead to one thing – a massive housing bubble. For example, Ulster County real estate listings show residential homes have gone up in value by 20% in less than two years. This is attractive to homeowners whom will add value to their asset through renovation and spectulators whom are able to turn their properties over (buy & sell) for record level profits. The rental market is also attractive to investors with rents rising steadily providing a satisfactory ROI. So, is the US headed into a housing bubble or are people getting nervous for no good reason?
What a Housing Bubble Looks Like
If you remember 2008, it may not have been a great year for you if you were involved in real estate. Realtors went from easily selling 10 or more homes a month on average to perhaps a tenth of the same amount. Home buyers who purchased their homes just before the bubble burst learned that their mortgages were underwater, and that they couldn’t sell for years without taking a financial hit. The housing bubble in 2008 was unexpected because everything was going quite well in the market. People were prosperous and home buyers were feeling confident in their investments.
Overvaluation Vs. Property Market Saturation
When a real estate professional predicts the future value of a property, here is what they do. Special attention is paid to historical prices – i.e. actual sales prices of homes over decades. Then, neighboring home sales prices are also considered. Analysts and valuers will take it a step further and look at economic growth of an area including the employers both current and those on the horizon e.g. if a business is setting up in the area and will be a major employer. So the demographics of the future home buyers, including their occupations is also considered. It’s worth noting here: predicting the future value of homes is not 100 percent accurate no matter what you do and how much data you mine. Local and global events (like the GFC) can turn your carefully crafted valuation upside down.
Supply and Demand in Real Estate
In one neighborhood, houses can be more than $100,000 than a home just a few blocks away just because there is more demand and buyers will pay more for renovated homes. Likewise, apartments can rent for thousands of dollars more because they are located in a prime luxury apartment building or simply because the area is known for having an award-winning school district. Real estate bubbles can form because of changes in supply and demand. If a bunch of homeowners were to try to unload their property all simultaneously, the beginnings of a real estate bubble could potentially form.
The fact of the matter is that experts won’t know if there is a real estate bubble until it actually goes ‘pop.’ Every year houses are bought and sold, and nothing is going to change that. Values on real estate will go up and down, regardless of whether there is a bubble looming or if the market looks like it is more stable than ever before.