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Turnkey Real Estate Investing

5 min read

What Causes a Housing Bubble Anyway?

Thu, Apr 25, 2024


In the real estate world, there’s almost always someone talking about a housing bubble. But what exactly is it? What causes it? And what happens after the bubble bursts?

Let’s start with the basic definition: a housing bubble is a situation where property prices rise rapidly and significantly, often far beyond their intrinsic value. We know prices are high right now…But how do we know if we’re in a bubble? Here are ten signs!

10 Indicators of a Housing Bubble

Indicator #1 – Rapid Price Appreciation

One of the primary indicators of a housing bubble is a rapid and unsustainable increase in housing prices. This appreciation often outpaces the growth in household incomes and fundamental economic factors, leading to inflated property values.

Is it happening now?: YES

Though price growth has slowed, we’ve seen unprecedented leaps in housing pricing since 2020. Despite everything working against appreciation, many markets only continue to see asking prices increase.

Indicator #2 – Speculative Buying

During a housing bubble, speculative buying surges. This is where investors expect quick profits from price appreciation rather than rental income or long-term value.

Is it happening now?: NO

Because the real estate market is generally more costly, fewer people can afford speculative buying. Because prices are already perceived as too high, we’re not seeing speculative buying nearly as much. The ship has sailed on pandemic-era price spikes.

Indicator #3 – Easy Access to Credit

Loose lending standards and easy access to credit can fuel a housing bubble by allowing more individuals to qualify for mortgages, leading to increased demand and upward pressure on prices.

Is it happening now?: NO

Lenders learned their lesson from the Great Recession. Lending standards have tightened up since. These strict standards mean fewer unqualified households get money, and fewer homes enter delinquency and foreclosure because of it.

Indicator #4 – Overleveraging

Borrowers may become overleveraged, taking on excessive debt relative to their income or asset value. This can contribute to financial instability and defaults when housing prices decline or mortgage rates rise.

Is it happening now?: YES

During the pandemic, extreme demand meant many homebuyers overpaid for properties, leading to plenty of buyer’s remorse. While many owners haven’t yet felt the sting of their overleveraging, a significant market crash or correction would change their tune.

Indicator #5 – Flipping Activity

Flipping, or buying properties to quickly resell them at a higher price, becomes prevalent during housing bubbles. Flippers contribute to speculative demand and price volatility.

Is it happening now?: NO

Because home prices are still hovering near all-time highs, flippers are more wary to ply their trade. It’s just tougher to make that quick turnaround and forced appreciation worthwhile.

Indicator #6 – Investor Sentiment

Positive investor sentiment and a belief in perpetual price appreciation can drive demand for housing during a bubble. Investors may overlook fundamental economic indicators and assume prices will continue to rise indefinitely.

Is it happening now?: EHHH

You’ll find sentiments vary dramatically among investors. But as it stands, people seem to feel more nervous about the market than excited by it.

Indicator #7 – Excessive Construction

Housing bubbles often coincide with a surge in construction activity as developers rush to meet demand fueled by rising prices. This can lead to an oversupply of housing units when the bubble bursts, exacerbating price declines.

Is it happening now?: EHHH

While new construction has improved and inventory is increasing, we’re nowhere near oversupply. Demand is just too high!

Indicator #8 – Media Attention and Hype

Media coverage and public perception fuel housing bubbles by creating a sense of urgency and fear of missing out (FOMO) among buyers and investors.

Is it happening now?: NO

Maybe this was true in 2020 and 2021 – but not now. We see more doomsaying than FOMO.

Indicator #9 – Unsustainable Affordability

Housing affordability deteriorates as prices escalate, making it increasingly difficult for average households to afford homes without taking on significant debt or stretching their budgets.

Is it happening now?: YES

American homes are more unaffordable than ever, with no real solution in sight. Even increasing interest rates only had a marginal effect on the market. Eventually, something’s got to give.

Indicator #10 – External Economic Factors

Economic factors such as low interest rates, strong job markets, and favorable demographic trends can contribute to housing bubbles by stimulating demand and investor confidence.

Is it happening now?: VARIES BY MARKET

The U.S. economy is not a monolith. While some markets are struggling, others are as strong, if not stronger, than ever. 

Is it wise to keep investing in real estate?
Further Reading: Yes, We’re Still Investing in Real Estate. No, We Aren’t Crazy.

So…Now what?

While the real estate market doesn’t tick all the boxes for a bubble, there are some indicators. We’ve all been feeling the pressure regardless!

At this point, it is unlikely we’ll see a true real estate bubble or subsequent burst. Minor market corrections have already happened. Inventory is climbing, and interest rates are slowly shifting back down. The best thing to do is proceed with caution and due diligence. Avoid over leveraging and invest in stable, reliable markets.


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Chris Clothier
Written by Chris Clothier

Entrepreneur, writer, speaker, ultra-endurance athlete, husband & father of five beautiful children. Chris puts these natural talents on display every day. As a partner at REI Nation, Chris addresses small and large audiences of real estate investors and business professionals nationwide several times each year. Chris is also an active writer, weekly publishing real estate, leadership, and endurance training articles.