June 13, 2024
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June 13, 2024
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Is the Real Estate Bubble Coming Sooner Than You Think?

The real estate market has been an unlikely beneficiary of the pandemic, increasing at rates last seen in the 1970s. As a result, many have been speculating about when the bubble is likely to pop. To help you prepare for any market downturn—expected or unexpected—we examine the components that could determine when the bubble might pop.


Are We Experiencing a Bubble or a Boom?

Likely due to the recent 2008 housing crisis and subsequent recession, some are adamant that we are in the throes of a bubble; this may not be the case.

Before we can determine if we are on the brink of the bubble popping, we should ascertain whether or not we’re currently in a bubble.

Unlike the 2006 housing bubble, which was spurred by risky lending practices, the current housing boom is initiated by limited supply and the lowest mortgage rates in history. In that regard, the sharp increase in housing prices is not comparable to the 2006 housing bubble. If we look at it holistically, we’re in a boom and not a bubble.

Nevertheless, the 2006 housing bubble and 2020 housing boom have one similarity: record breaking house prices in a relatively short space of time.

Cautious speculators are left wondering whether these prices are sustainable and whether the inevitable downturn will be a slow decline back to reasonable prices or a sharp downturn that leaves buyers and borrowers holding the bag.

Hopefully, it will be the former. But, having a guideline on when to expect the bubble to end can help sellers, buyers, and investors better navigate the market.


When Will The Bubble Pop?

We’ve been in the midst of a housing boom for over 15 months. The downturn is coming. It’s just a matter of when.

Most speculators believe that this bubble will pop in early 2022. However, there are signs it could come sooner than anticipated. The truth lies in a gray area that relies heavily on components that could be the catalyst that reverses the gains.

It’s also important to note that not every component carries the same weight in today’s market. Regardless, these are some of the warning signs that will be a precursor to the boom end.


Speculators Becoming Conservative

When the market sentiment is mostly speculative, even the slightest unfavorable shift can cause panic, resulting in real estate market gains diminishing. Furthermore, when pundits who were previously optimistic begin touting conservative estimates regarding growth and prospects, it’s the biggest tell-tale that the boom is ending.


Supply Outstripping Demand

Presently, the demand is surpassing the market supply. When examining historical data, that’s the best sign that real estate market trends can endure, considering that the catastrophic housing crisis came down to supply outstripping demand.

Furthermore, it has been suggested that the annual housing market is underdeveloped by approximately 5.5 million homes. Meaning there is still a long way for housing demand and supply to be at equilibrium. But the moment these figures begin leveling out with supply increasing above anticipated demand is the moment the downturn will take effect. Remember that supply is likely to trail the demand by a few months because building and flipping projects take longer to realize and catch up to demand. But, when these projects reach completion, supply will increase, with demand remaining relatively unchanged.


Interest and Mortgage Rates Increasing

Since the 30-year fixed mortgage rate is the lowest it’s ever been, buyers and investors are maximizing this and trying to purchase as many homes as possible. When the Fed raises rates, causing lenders to increase mortgage rates, demand will lessen and cause a downturn.


Mean Reversion

The final component that could cause the end of a boom is the natural flow of every market. You’ve probably heard of the saying, what goes up, must come down. Property markets also experience a similar phenomenon known as mean reversion. This boils down to rising prices returning to the mean, or price that most reflects fundamentals.

All these components aside, even if the country is still in the throes of a boom, what matters most is local buyer sentiment. In any real estate market, the golden rule remains. Your home is only worth what a buyer is willing to pay.

Levy Tewel is an associate real estate broker and team leader of the Tewel Team at Compass, helping sellers and buyers in Bergen County and New York City, with nearly a decade in the business, and over one thousand closed transactions. Levy can be reached at 201.477.0117, [email protected], www.TewelTeam.com .

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