Hindsight truly is 20/20. While the financial crash of 2008 hit many people like a ton of bricks, if you look back at the events that led to the financial debacle, you can clearly see that it wasn’t that unsurprising. The only surprising thing about the crash, if anything, is the fact that it didn’t happen sooner. It seemed like the whole system was held together by paper clips and rubber bands. Seriously. Bad regulations. Bad government incentives. Greed. All combined to a nasty financial explosion that crippled markets all over the globe.
However, the core of the problem was in the frenetic real estate market that spit out the cash that inflated the bubble. Studying the signs of the real estate crash can be very helpful to you. How? Well, first, you won’t buy at the top of a bubble. Second, you can save your money so you can swoop in when the market craters, and you can come out of the financial debacle a rich person. Here are the top 3 danger signs of a real estate bubble.
More speculators buying than end users
One of the hallmarks of a bubble market is when much of the price ‘growth’ in real estate is fueled by speculators or ‘flippers’ buying real estate than people who actually want homes to live in. The reason this is a problem is that flippers usually borrow money to fund their activities. This money can’t wait very long before it has to be paid off. So if there is a delay in selling the property being financed, default is imminent.
Usually, this isn’t a problem if only one flipper defaults. It might not even be a problem if a hundred of them default. However, it does pose a major banking issue if thousands of them start defaulting. And it all begins when the market is fueled by speculative buying. Be on the lookout for this and stay away from the market if you see this.
Median prices outpaced median income
Housing prices can only go up as much as a certain multiple of real household income. At least, this should be the rule. In normal markets, this is, indeed, the rule. However, if you are staring at a real estate bubble, this rule goes out the window. At the height of the last real estate bubble, there were houses selling for millions of dollars when the people living in those houses didn’t even make a tiny fraction of the house’s value. See what’s wrong with that picture? Well, if you see that picture again in the future, you will know what to do with your investment money.
Rise in no income/no job/no assets lending
Thanks to stronger mortgage lending rules, much of the excesses of the last real estate bubble are, hopefully, behind us. One of the worst excesses was when people with no jobs, no assets, and no income can get high interest loans to buy homes. The mortgage companies didn’t care because they knew these people will flip the property anyway and the finance companies just wanted to make money off the quick appreciation.
Well, this is no longer the case, but it can still happen thanks to special regional cases and certain loopholes. Be on the lookout when you see more and more of these situations happening.