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Is it a Housing Bubble? 3 Symptoms to Look For

Posted by Justin Havre on Tuesday, August 14th, 2018 at 9:38am.

Symptoms of a Housing BubbleUttering the words "housing bubble" is enough to make any real estate agent or interested real estate investor shudder. It conjures up images of the great real estate bubble burst of the new Millennium, which ushered in the Great Recession and brought along with it one of the worst housing markets in history.

Fortunately, most housing bubbles are not this drastic and these real estate phenomenon is actually more common than most people think. These are the common signs and symptoms that are associated with a housing bubble.

Cost of Living Increases Faster than Wages

Inflation is often a warning sign of many economic conditions, including a housing bubble. When the cost of living rises faster than wages, people are often forced to rely on credit in order to maintain their lifestyle. Rather than paying cash for groceries, utility bills or mortgages, they rely more heavily on credit in order to make ends meet. During a real estate bubble, home buyers often have credit available and sometime spend more than they can afford. This spending drives up prices in a given market, but it doesn't necessarily mean that the buyers who are interested in the available inventory truly have the means to purchase those homes.

Availability of Creative Mortgage Financing

In a housing bubble, those who are looking to purchase real estate often need to rely on creative financing in order to secure the type of house that they want. Generally, those who may not qualify for traditional lending options find that they are able to better secure credit during a housing bubble. Fortunately, since the housing crisis more than a decade ago, regulations have been created with enforcement and credit restrictions. These are in place to prevent people from taking out a loan when they likely should not be.

Minimal Down Payments

During a housing bubble, people might purchase homes even if they do not have available cash for a down-payment. Down payments dwindle, with many home buyers putting down less than 5 percent cash on their loan prior to purchasing it. This results in larger mortgages and payments, and it often leads to homeowners that cannot afford their properties in the long-term. While many local markets across the country are hot right now, there are still a great many home buyers paying cash or putting a significant amount of cash toward their homes upon purchase.

Interest Rates May Increase

In addition to all of these other symptoms, rising interest rates also may indicate the formation of a housing bubble. Even a small increase in the interest rates can make home ownership nearly impossible for some buyers, and it has a tendency to cool down markets significantly. In a market in which there is plenty of leverage and people are relying on credit to purchase their homes, very low interest rates can set a market into a full-blown bubble. Buyers have come to expect low interest rates, so it's only natural that they will start to get nervous once the rates start to rise.

Fortunately, many lessons were learned during the housing crisis that led to the Great Recession. While the market is always subject to real estate bubbles, investors, lenders and consumers do as much as they can to prevent bubbles from getting so big that they burst. Information on the current conditions in your local real estate market, including the question of a real estate bubble, can often be answered by a professional North Calgary real estate agent.

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