What Is A Housing Bubble, And How Do I Know If We’re In One?

In an era of high inflation and global uncertainty, finding the right investments to protect the value of your wealth is critical. As a result, investment experts often recommend holding real property as a potential “hedge” for investors looking to escape volatility. Real estate, as a physical asset, can help to balance your portfolio, create lasting long-term value, and even offer income potential in an era of rising rents. 

However, as with all investments, real estate isn’t guaranteed. As anyone who lived through the subprime mortgage crisis and subsequent housing value dip of the early 2000s knows, even real estate doesn’t always just increase in value, and no investment is 100% protected from market forces. Like all investment markets, an overheated housing market — sometimes called a “housing bubble” — can always come back to earth. Rising home prices, then, have investors and homebuyers alike asking what a housing bubble is, how to know when we’re in one, and how to craft an investment or homebuying strategy that protects your most important investment, your home.

What Is A Housing Bubble?

Investopedia defines a housing bubble is:

“a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators pour money into the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices—and the bubble bursts.”

Housing bubbles are often characterized by an influx of speculators into the market and an increase in high-risk or subprime mortgages to buyers whose financial situation may not qualify them for a traditional mortgage. When prices begin to stagnate or even fall and the housing bubble “pops,” speculators and those with subprime mortgages often rush to sell, flooding the market with inventory that outstrips demand, leading to a downward spiral in home prices and the devaluation of property values.

How Do I Know If My Market Is In A Housing Bubble?

The most important way to understand whether a market is in a bubble or simply in a sustainable growth cycle is to evaluate your market’s fundamentals. While national trends can be informative, every market is different, and the extent of speculation, the pace of new housing development, and the availability of high-risk credit are all factors that can help you assess the fundamental strength of a particular housing market. 

According to Freddie Mac, housing supply in the United States is generally still falling short of demand, suggesting that prices will continue to rise. Rising interest rates, however, are likely to have a slowing effect on even the hottest markets, as homebuyer purchasing power declines. In addition, lenders that learned an expensive lesson about extending credit to high-risk buyers in 2007 and 2008 are still unlikely to extend the kind of easy credit to speculative buyers that can lead to a hard crash in prices. Many experts, then, expect the red-hot national market to cool somewhat, but are not predicting a crash reminiscent of 2007

However, these national trends don’t translate to every market. The market can vary from city to city, and neighborhood to neighborhood, or even home to home. Evaluating the strengths of a given investment requires expert advice and a deep understanding of local trends. An experienced, knowledgeable real estate agent can help you evaluate the strengths and weaknesses of a given home purchase, and help you to make the best investment for you.

How Do I Protect Myself And My Investment From A Housing Bubble?

Even in an uncertain market, there are a number of things buyers can do to protect themselves against the potential for a market correction. 

Don’t Fall Victim To FOMO

In a hot housing market, it’s easy to get emotional. After all, this is where you’ll be living and building memories. When the market heats up, buyers can get caught up in the idea that if they don’t take the first available home, the market will simply pass them by. Home searchers who watch housing prices jump significantly over the short-term might, then, be willing to overlook obvious risks and make the emotional decision to jump into an unsuitable home. 

This strategy is a bad one. It generally leads homebuyers to take on risky debt, buying homes that are not a good fit, and becoming more exposed to short-term market volatility. Keep in mind that your home purchase is, above all, a financial investment — avoiding emotional decisionmaking now can be a key factor in protecting your investment dollar down the line. 

Keep Your Long-Term Picture In Mind

If, like most buyers, you’re searching for a home you can live in for a long time, the short-term ups and downs of the housing market aren’t going to affect your investment much. Over the long term, housing as an investment tends to hold its value well. Even the markets that were most devastated by the housing bubble of the early 2000s have largely recovered, and exceeded — even the highest prices that characterized that period. 

As a long-term proposition, housing in popular areas will always be in demand. While market corrections can have a significant impact on speculative investors or those looking to flip homes for short-term profit, most homeowners don’t fit into these categories. 

Riding out any market corrections comes down to making the most solid investment you can when you buy your home. Think about the fundamentals — what you can afford, where you want to be long-term, and whether your home will suit your needs in five or even ten years. Instead of trying to “time” the market, getting good advice and making a sound investment is much more likely to pay dividends down the road. In this, as in all aspects of home purchasing, getting the right advice matters. A knowledgeable agent can help to steer you in the right direction when it comes to finding a home that is going to serve your needs for years to come. Your experienced agent can also help you with creative solutions, even in a seller’s market — crafting the best offer is about more than just the bottom line. 

When Home Means More, You Need A Team With More To Offer

Whether you’re buying or selling your Chicagoland home, understanding your market is critical. Buying or selling a home is a big deal, and our homes have never been more important. That’s why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it’s the beginning of a story or the end of a chapter, we’re here to help.

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