What Are the Signs of a Housing Bubble?

What Are the Signs of a Housing Bubble?

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Are we in a real estate bubble?’ ‘Is the real estate market about to crash?’ These are some of the questions being asked by Americans as the coronavirus pandemic rages. With memories of the US housing bubble 2008 still fresh in many minds, the fear and anxiety are palpable.

Before we talk about the possibility of a housing bubble burst, it is vital to first understand what a housing bubble is and the signs.

So, What Is a Housing Bubble?

Also known as a real estate bubble, a housing bubble is a situation where housing prices increase drastically fuelled by speculation and demand. It begins with a surge in housing demand in a market where there is limited inventory. As the prices start rising, speculators enter the market looking for high returns. With all the new demand and limited supply, the prices rise up even further. If this trend continues over time, it will result in the housing bubble bursting. This will cause a sharp decrease in prices in order to compensate for the glut of properties. Those who bought properties during the bubble are left struggling to pay their mortgages, and eventually end up selling their homes below market value.

Housing bubbles don’t occur very often. However, when they do, they can have a major long-term effect on the economy. When the bubble bursts, property owners will struggle to make their monthly payments. This results in a great loss of savings, an increased number of foreclosures, and general financial instability.

4 Signs of a Housing Bubble

So, what are the indications that a housing market is about to crash? Here some warning signs to look out for:

Skyrocketing home prices

One of the major signs of a housing bubble is fast-rising home prices. You should be especially concerned if property prices are increasing faster than salaries. This means that mortgages will be out of reach for the ordinary person. Those that borrow might end up with loans that they cannot afford.

Related: What Is the Difference Between a Housing Bubble and Inflation in Real Estate?

Many risky mortgages in the market

One sign of a housing bubble is the presence of risky mortgages in the market.

When you see lower credit standards and high-risk loans flooding the market, it is an indication that a housing market crash is imminent. When lenders are not strict in their mortgage requirements, they end up offering loans in bulk to buyers who cannot really afford the properties. This is one of the factors that triggered the housing market bubble 2008. Many lenders extended limited documentation loans and subprime loans to risky applicants, which eventually led to the Great Recession.

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Most loans issued require mortgage insurance

The standard down payment on an investment property is 20%. However, many buyers can’t afford to put down such a large amount. Since such borrowers are considered riskier, they are required to have mortgage insurance. With their limited savings, such buyers are more likely to default on their mortgage payments. When many of the loans originated require mortgage insurance, it is a sign of a housing bubble.

Rising interest rates

Another major sign of a housing bubble is a continuous trend of rising interest rates. When interest rates are low, income property is more affordable. As a result, the demand for housing usually increases. However, as interest rates rise, borrowing becomes more expensive. Buyers who had bought property earlier at adjustable rates might find themselves struggling to keep up with their mortgage payments. Even if the rates go up by 0.5%, it could mean an extra few thousand dollars on top of their regular mortgage payment.

Increasing interest rates will also have an impact on investors that have not yet entered the real estate market. As the rates increase, homes will become more expensive. This will slow down demand for housing, thus resulting in a property glut.

Related: Should We Expect a US Housing Market Crash 2020 Due to the Pandemic?

Is the US Housing Market in a Bubble?

It is a fact that the US housing market has been hit hard by COVID-19. Due to the shutdowns and massive loss of jobs, many tenants have been unable to pay rent. Similarly, many property owners are struggling to make mortgage payments. As a result, the Department of Housing and Urban Development (HUD) and the Federal Housing Finance Authority (FHFA) announced a moratorium that protects property owners that have mortgages guaranteed by Freddie Mac and Fannie Mae. Under this moratorium, lenders are not allowed to take foreclosure actions or evict owners from these properties. The moratorium has been extended to the 31st of January 2021.

Despite the pandemic, recent research shows that strong demand for property persists. In the week ending November 28, the median listing price was $338,675, an increase of 12% from a year ago. However, overall inventory dropped by 33.8% from the same period in 2019. Among the markets that experienced the greatest drop in inventory include Raleigh (-45.2%), Riverside (-48.2%), Salt Lake City (-48.9%), and Baltimore (-46.1%). Overall, home values have appreciated by 6.6% over the past year, and are expected to rise by 7.9% in the next year.

So, will the increase in prices and shortage of housing inventory result in a housing market crash in 2021? This is highly unlikely. A recent report from NAR on supply and demand in real estate shows that the number of existing home sales has increased to a level not seen since 2006. The Federal Reserve is not likely to raise interest rates anytime soon. Not only are homeowners taking advantage of the chance to refinance their existing mortgages, but low interest rates are keeping demand up in the market. There is unlikely to be a swift drop in demand or a sharp increase in inventory any time soon.

Additionally, the market has recovered from the pandemic on a national level. In the week ending December 12th, the housing market recovery index by was at 112.1 nationwide. The recovery index shows that there is an improvement in the inflow of both sellers and buyers. Markets showing the greatest recovery include:

  • Seattle housing market
  • San Francisco housing market
  • Boston housing market
  • Los Angeles housing market
  • San Jose housing market


As the US economy continues to strengthen, the housing market is expected to remain vibrant. There should therefore be no fear of a bubble bursting in the US housing market 2021. However, be sure to keep track of real estate market trends before making any investment decision. You should also make use of real estate investment tools like Mashvisor’s real estate heat map and rental property finder to find the best traditional and short term rental properties.

Related: How to Prepare for a Real Estate Downturn

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