With a new year and a new president approaching, change is on the horizon for the real estate market. While we’re cautiously optimistic that the U.S. housing market will turn in our favor, we also know this: success depends less on market conditions and more on our informed decision-making backed by solid fundamentals.

Identifying risky real estate markets is crucial for investors to protect their capital and make informed decisions. But how can you know that a market carries elevated risk? Take a look at these critical factors!

8 Risk Factors Indicating Real Estate Market Volatility

#1 – Economic Indicators

• Job Market Instability
• Population Trends
• Economic Volatility

First things first: economic indicators. Markets heavily reliant on a single industry or experiencing layoffs and high unemployment are riskier. Pay attention to industry demographics, volume of new businesses and employers, and wages. Be mindful of what these industries are, too. Markets tied to volatile sectors, like oil or tourism, are prone to sharp economic downturns. A poor outlook can be catastrophic when the market relies on those industries.

Declining population growth or outmigration signals reduced housing demand, too. While there will always be a natural ebb and flow to population, you want to be wary of patterns of decline.

#2 – Real Estate Market Data

• High Vacancy Rates
• Price Volatility
• Oversupply
• Declining Rent Growth

Investors should look to real estate market data at every opportunity. High vacancy rates or stagnant/falling rental rates mean weakened demand. Beware, too, of activity in “hot” markets. Rapid price increases often result in corrections. These areas frequently experience overdevelopment, too, leading to depressed property values and rental rates.

#3 – Affordability Metrics

• Unbalanced Price-to-Income Ratios
• High Cost Burdens

Affordability is the challenge in real estate right now. Costs are simply high. While that alone isn’t necessarily a reason to write off a market as risky, investors must be mindful. Where property prices far outpace local income levels, it signals overvaluation and reduced sustainability.

Further Reading: 6 Hidden Risks That Come with Passive Real Estate Investment

#4 – Government and Regulatory Risks

• Unfavorable Regulations
• Tax Instability

Markets with stringent rent control or anti-investor policies increase operational challenges. These often impact multifamily housing more than SFRs, but be mindful. Additionally, consider tax policies. Areas with high property taxes or potential sharp tax increases eat into profits.

#5 – Local Infrastructure and Amenities

• Poor Quality of Schools and Services
• Lack of Infrastructure Investment

Markets with poorly rated schools and underfunded public services deter long-term residents. When these needs emerge, they’re likely to move! Poor infrastructure matters, too, from transportation access to the availability of quality wifi.

#6 – Market Dependence on External Factors

• Seasonal or Tourism-Dependent Markets
• Vulnerability to Climate Risks

Markets heavily reliant on short-term rentals (Airbnb, VRBO, hotels & tourism) can face volatility during economic downturns. Their presence isn’t inherently bad, but the reliance on a luxury industry (tourism) can be risky. Speaking of risk…Markets with significant exposure to natural disasters (tornadoes, hurricanes, floods, wildfires, etc.) may require higher insurance premiums and maintenance costs. (We’re not trying to pick on Florida, promise!)

#7 – Historical Performance

• Frequent Boom-and-Bust Cycles
• Slow Recovery from Downturns

Markets with a history of unstable property prices can signal speculative bubbles. You want to avoid these rollercoasters – aim for slow and steady. Additionally, if a market took longer to recover from past recessions, it might be less resilient. Consider the markets that fared best after the 2008 Great Recession. Houston bounced back fast because it had a diverse, strong backbone and a tempered market that didn’t have as much room to fall.

#8 – Lending and Financing Trends

• Increased Subprime Lending
• Rising Mortgage Delinquencies

Finally, consider financing trends. A high volume of risky loans may indicate a housing bubble. Growing default rates suggest financial strain in the market, ultimately leading to foreclosures and depressed housing prices.

6 Practical Risk Mitigation Action Steps

• Diversify Investments: Avoid overconcentration in a single risky market.
• Monitor Leading Indicators: Stay informed using tools like housing reports, census data, and economic forecasts.
• Defer to Local Expertise: Work with knowledgeable local real estate agents, turnkey partners, and property managers.
• Focus on Fundamentals: Prioritize markets with stable job growth, population inflows, and strong housing demand. Don’t be swayed by hype.
• Avoid Overpaying: Avoid overpaying or waiving necessary due diligence in competitive markets.
• Manage Expectations: Don’t fall prey to the fallacy of a “get rich quick” mentality. Real estate is slow and steady.

Still worried about investment risk? Don’t worry – your REI Nation advisor is ready to help you build a world-class portfolio.

Start investing with REI Nation, where you invest and we handle the rest!