Tell-Tale Sign Of A Real Estate Market Bubble

Performance Property Real Estate Question

Q: Gerald, it seems like real estate prices have been going up quite a bit lately.  Is this another bubble?  How can we tell? Jennifer, Islip, NY

A: That’s a great question, Jennifer.  Home prices in many places have been rising recently due in large measure to the fact that there is so little housing inventory available for sale because so many people bought at the height of the last market bubble and have little or no equity.  To your question, what I’m going to do is give you a tell-tale sign of another real estate market bubble.  Because household income is the biggest economic driver of residential real estate markets, a tell-tale sign of a real estate bubble occurs when home price increases far outpace personal incomes–when this happens there’s only a matter of time before home prices have to fall because people’s incomes simply can’t support those inflated prices. 

The last real estate market bubble was so big and so destructive because it was not only a housing bubble but also a credit bubble where lenders were giving away free money offering no doc and stated income mortgage loans.  The credit bubble magnified the gap between real incomes and wages and home prices. 

Even as home prices have increased in many places lately, lending requirements remain fairly strict, so I wouldn’t worry about a repeat of what happened during the financial crisis, nevertheless, it is important to look at home price increases in your local real estate market versus income and wage increases as a potential sign of a real estate market bubble.  

Thanks for your question, Jennifer, good luck. 

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