I get this question all of the time: Are the real estate markets in a bubble? First, we have to look at how a bubble is defined. In researching the definition of an asset bubble, I came across all kinds of meanings that are difficult for most people to understand. So I will take a shot at my simple definition of an investment bubble by listing the characteristics of a real estate bubble.
It is a supply and demand issue
In an investment bubble, there is more demand than supply. With the real estate markets, you have a significant pool of people wanting houses. Unfortunately, there is a limited supply of homes to meet that demand.
Consumers are paying a premium for real estate
In this market, home buyers are making offers for homes well over the listing price
It turns into a Mania
Consumers are under the notion that there is no end to how high real estate prices can go. When you have 20 to 30 offers and all offers are over the list price, you have a mania playing out.
When the psychology changes, the bubble bursts, and prices start to come down
An investment bubble continues to inflate until something changes the psychology of the market. In an interview with mortgage consultant Mark Pfieffer, he suggested that an excellent example of something that could end the real estate bubble would be an unexpected spike in interest rates. This would make mortgages more expensive and least affordable. Typically it is an event that we don't see coming then investment bubbles.
Having said that, this particular bubble is difficult to forecast due to the unusual combination of events that is creating it. Plus, when investment bubbles are getting towards their peak in prices, no one is talking about bubbles. They're talking about how high prices are going to go.
Today a good percentage of consumers believe that the real estate markets are in a bubble. Generally speaking, markets are not labeled as being in a bubble until after the bubble bursts.
I do believe that this is a once-in-a-lifetime real estate market whose ending point is very unpredictable. Only time will tell us how this ends up. Historically speaking, investment bubbles do not end well.
Need a second opinion about money and investment issues? Just ASK BOB! Bob is available and always happy to share his views. Bob Brooks is a Financial Adviser and host of The Prudent Money Radio Show, aired daily at 3 PM CST on 91.3 FM, 97.5 FM, and 99.9 FM in the Dallas Forth Worth metroplex. Listen online at www,prudentmoney.com. You can reach Bob at 972-386-0384 and online at firstname.lastname@example.org.