5 Signs You're In a Housing Bubble

A housing bubble can be a wonderful thing for a seller who's planning to move to a far less expensive part of the country, but it can be a nightmare for buyers and local sellers alike. And unfortunately, it's not always as easy as a person might think it is to spot. For example, Southern California may have seen a burst after the Great Recession, but their values have only climbed since then. If a buyer was waiting for a decline, they might be waiting for longer than they ever imagined. For buyers who can afford to exercise a little patience, look for these five neighborhood traits before deciding one way or the other.

Home Prices Exceed Average Salaries

When the average salary of a neighborhood is $35,000 a year but the average cost of a home is $800,000, it usually means the market can't sustain itself. Unless a buyer can point to a clear event that will explain this discrepancy (e.g., a new car plant is opening in three weeks), they should likely wait to start their shopping or perhaps look at a different market nearby. Salary information may not always be readily apparent, but home buyers may be able to find certain information online or even by calling a local real estate agent to learn more about the assets of both the sellers and buyers.

Loans Are Treated Like Candy

When a bank is in far too big a hurry to give out loans, it's a clear sign that something is wrong. It's a myth to believe that all decision-makers learned their lesson from history, and it's a misconception that may lead homeowners down a dangerous path. Close inspection of government action reveals that they too are still taking risks that make financial experts nervous. If a neighborhood is giving out high-risk loans to buyers who simply don't have the means to pay them back, it won't be long before the foreclosure signs start to outnumber the amount of Alexandria homes legitimately placed on the market.

Jumpy Interest Rates

Unlike loan or salary information that will take some digging to suss out, interest rates are thankfully easier to research. If a home buyer notices that the local lenders in an area are charging far more than they would have expected, it could mean that the lender is trying to financially overcompensate for homeowners who were unable to meet their financial obligations. Whether it was in the form of unpaid property taxes or defaulting on their loan entirely, interest can rapidly go from low to high in a neighborhood that's hit hard by economic woes. And few events will cause demand to drop like that kind of instability.

Buyers Outside the Bubble Stop Wanting In

The people within a bubble aren't always the prime candidates to spot that they're in the middle of one. When people from outside the neighborhood start to abandon it, it could be a sign that they've noticed something the locals haven't. Because their perspective isn't so personal, it's easier for them to see certain elements that make an area less desirable. This information is often told anecdotally in a town, but a buyer can also check with a real estate agent to find out more about the trends in a neighborhood. A somewhat obvious sign would be if tourism rates start to dip down in the neighborhood.

The Market Becomes Flooded

If there are too many investors in a market, it's going to drive the price up very quickly. But no matter how limitless a market may seem, there will always be a cap. After all, there are only so many people out there who can afford the most expensive of homes. If there are too many investors out there looking to flip or invest in homes, it will inevitably rack up incredibly high rates of debt. Home flippers aren't interested in building up home equity, and they shoulder higher interest rates and fees than typical homeowners. If that debt can't be repaid quickly, then the market is most likely to collapse under its own weight.

It's easy for someone living across the country to regard market fluctuations as just another day, but a conscientious buyer can point to the events that caused the changes. Housing bubbles are comprised of more events than any one of these signs, but these tips give buyers a solid starting point to spot a bubble. If lenders are still being picky, the interest rates look stable, and the salaries continue to rise, then it's likely time to buy soon because the prices are unlikely to go down in near future.