Real Estate News & Commentary

How to Invest in Property When You Fear a Housing Bubble

Expertise: Business Management, Landlording & Rental Properties, Real Estate News & Commentary, Real Estate Marketing, Personal Development, Real Estate Investing Basics
106 Articles Written
housing bubble

Real estate analysts are fond of breaking the market down into two essential sectors: smart money vs. dumb money. “Dumb money” consists largely of people who are ill-informed or are operating on last quarter’s news, or (increasingly these days) are automated systems whose rules aren’t in line with how sharp investors operate. “Smart money” — well, hopefully that’s you and the others like you who come to places like BiggerPockets to learn before you invest.

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The smart money folks these days are investing carefully because many analysts are pointing to the formation of a new housing bubble as bad or worse than the one in 2006. This bubble is fueled not by American families buying a second home to rent out, but instead by the massive rush of foreign investors and massive conglomerates buying up hundreds of distressed properties at a time. This has led many analysts to conclude that housing prices are inflated not because actual demand is high, but because speculative demand is excessive — once the properties are purchased by investors, there simply won’t be anyone to rent it or buy it on the other side.

Related: Housing Prices Keep Climbing: Should You Sell Your Property or Wait?

But bubbles are geographical in nature; not every market forms bubbles at the time or to the same degree. So how can you recognize a housing bubble and what can you do about it?

Signs of a Housing Bubble

The following list was harvested from a number of different expert articles. It’s nothing more a compilation of the items various experts look for when they define a “housing bubble”:

  • When more subprime mortgages are being written by non-bank lenders than by banks.
  • When there is a higher foreclosure rate on loans originating this year than last year.
  • When home prices are rising significantly faster than average wages over several months.
  • When the rent you could reasonably charge for a house is less than a reasonable standard mortgage payment on that house.
  • When there are too many houses available to rent for the number of renters.
  • When the housing market in the region is overvalued, especially when growth is below average.

Investing Into a Bubble

The standard advice, as you might expect, is that if you see bubble, you should find somewhere else to invest — or wait. That's because the fate of a housing bubble is predictable — housing prices are going to plummet when the bubble bursts, making any investment you make a losing gamble as the value of your equity vanishes. But there are ways to avoid that failure if you're canny.

One of the most successful strategies for investing into a bubble is to take a dramatically longer — or dramatically shorter — view of the market than the standard advice would give. For example, if you believe the bubble is going to continue to inflate for a few years, invest in a “fix and flip” strategy and sell before the pop for a quick profit.

Related: Don’t Believe the Housing Bubble Rumors — Unless You’re in These 7 Markets

Investing Outside a Bubble

Alternately, if you can find a market like Detroit that is significantly undervalued but showing signs of real growth, you can take the long-term strategy, counting on the fact that eventually the market will correct and your investment will pay off (and the rent will help cover costs in the meantime). This is especially true of areas that have a bubble forming nearby, as bubbles tend to have small ripple effects around them as they rise. So if you look around and find signs of a bubble in your usual area of comfort, spend a little time and effort looking for undervalued areas nearby — that way, you can turn the bubble into your friend rather than your foe. Don’t be the dumb money!

What do YOU think about the current housing market? Do you have strategies for investing when you fear a bubble is imminent?

Let me know with a comment!

While in the mortgage business, Drew rose to a VP position at the first broker he worked for and then started his own company. In the pursuit of excellence, he obtained several mortgage designation...
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    Chestna Thomas Real Estate Investor from Deland, Florida
    Replied about 5 years ago
    Thank you for this article and for the very clear, laymen’s-terms way in which you’ve explained it. It makes me think that I don’t have to be a super-smart, credential-packed financial analyst in order to invest “smart money.”
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied about 5 years ago
    I sort of remember 2008’s real estate market. I remember that CA was dropping but us in Atlanta all thought it was just an over heated West coast thing. What we missed was the root cause. Job loss. That spread everywhere. We’ve moved to supper cheap houses, all in is $35k or less. One form of protection to bubbles is to work the cheap side where you own in cash. It’s tough to be hurt bad when there’s no debt. Another tactic is: buy the cheapest house in a good high school district. Great schools 7 or better. When you buy cheapest but quality you will always find demand. The far side of bubbles happen as demand falls, dropping prices. Focus on places with job GROWTH, in good school districts. The Detroit play is purely based on cheap. If there’s a return of quality jobs, then ok. Do your job and rent demand at: There’s a way to find recent employment, rent prices, jobs in city-data. You have to poke around. Demand is a function of migration TO an area:
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied about 5 years ago
    I do think it’s worth noting that it’s much more challenging to spot bubbles than most think. It’s tough to time a market. Yes, the crisis looks obvious in hindsight, but think of how many predictions have been made that never came true of crises around the corner for whatever obvious reason some pundit was making.
    Roy N. Rental Property Investor from Fredericton, New Brunswick
    Replied about 5 years ago
    Andrew is correct: Bubbles are hard to forecast … or rather, they are easy to forecast, just tricky to time. The housing market in most parts of Canada would check off 2 -4 items on your list of signs … and it’s been like that for about a decade.
    Russell Brazil Real Estate Agent from Washington, D.C.
    Replied about 5 years ago
    Bubbles are impossible to predict….but if you are that confident there is one…ride the wave. Bubbles can make people rich.
    Joshua Nicholas Commercial Real Estate Broker from New York, New York
    Replied about 5 years ago
    The best way to weather a bubble bursting is having long duration debt. As long as your debt service coverage is 1.25 or better, you borrowed no more than 70-75% LTV and a 5 year loan (at a minimum, for extra safety ideally you would have a 7-10 year loan), you’ll be OK 99.99% of the time.
    Tim DiCicco Real Estate Agent from Philadelphia, PA
    Replied about 5 years ago
    Does anyone have an opinion on types of rentals that may help protect you from some of the affects of a bubble bursting? I am not sure but I think student rentals may fall into that category. My reasoning is that even in a bad economy students are still going to school. They still want to live off campus for more freedom and because its way cheaper then leaving in a dorm. Another reason is that most kids simply obtain more loans to cover there living expense. So they don’t really feel the affect of paying $400 per month until they graduate and have to repay their student loans. As opposed to most other people who have to cut that check every month from their earnings and realize immediately that there is no money left in their account for take out. Does that make sense? For college kids its almost as if they are spending monopoly money for us adults we know all to well that money is real. Thoughts? Best, Tim
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied about 5 years ago
    Tim, quality and cheaper deals are last to freeze up. McMansions is where the pain was first felt. So the fix and flippers got hurt worst. Then the the free money lending emptied out the landlords SFRs because renters turned to the free money and jumped into owning (then they lost the homes). Owning SFRs in top high schools will always find a nice family wanting their kids in a good school. The landlords that where hurt with empty rentals and debt service owned in marginal to rough neighborhoods where even dropping the rent didn’;t find a taker. If you own quality you will be more protected from a job loss driven down turn. Be quick to cut your losses. Evict quickly, sell quickly, dump quickly. Those hurt worst tried to hold on. Here in Atlanta we heard the news from California about fippers getting stuck holding the bag. 9 months later it was hear too. You CAN see a bubble coming, depending on where in the country you live. That is if you learned from the past AND keep your business model eyes open AND watch for symptoms of problems. The closed minded will never see anything coming. We’ve moved down price range where all in is $35k with cash, no debt. Meaning our pain point before we are loosing money is around $100/mo. 🙂 Today our rent is $825 to $900/mo. We have a BIG margin of safety before we are bleeding.
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied about 5 years ago
    So what is a bubble? And what type of bubble can hurt investors/landlords? A price driven bubble? Is that what we are talking about? Some SFRs and occupant home sales prices have run up too high? As long as lending standards don;t cause a rash of foreclosures like last time (driven by an avalanche of job looses) then just the fix and flippers will have their profit pinched. IE Paying too much, loosing control of rehab costs and having more in then what the market will pay. This is a tough one, and why we will never get into fix and flip. Way too hard to work 12 months a year, yet seasonal buying is very cyclical peaking in spring. IE folks who don’;t watch the cycle may over pay in late summer and have an expensive flip forsale at the low of the market in Dec-Jan. I don;t know how to help these folks! It’s much safer to buy from Nov to Jan when prices are lowest, fewest investors bidding and have the rehab done by March ready for the peak selling season. Thankfully for Dodd Frank lending standards are very good. The stats I’m hearing is that the default rate on the newly minted mortgages are very very low. So Dodd Frank is working in that I don’;t expect the owner occupied market to fall off a cliff. We are seing 5% price reduction going into winter, but that’s a normal seasonal cycle. I hope fix and flippers knew that and aren’t blaming some “bubble” on the recent price drop!!! Rentals: don’;t buy rentals in markets with too many on the market empty. Use, go to rentals, put in your area name. Count how many pages of rentals, are subject lines all caps, are some rentals offering 1st month half off or discounted? Buy in areas with few to one page of inventory, no caps in the subject and no discounted first months. I see landlords buying cheap houses in rough areas that already has too much inventory. Those renters are being trained to jump between rentals taking advantage of cheap to free months. Not only are the houses and area low quality but the renters are low quality too. Our rentals in top high school districts have a big problem!!! They never turn over and I never hear from them. If you want a job managing rentals, never buy nice houses in good school districts, your phone will never ring. 🙂 🙂 🙂
    Dodie Dawson from Seattle Tacoma, WA
    Replied about 5 years ago
    Thank-you so much for your wise advice. I agree 100% in not buying rental property in poorer communities. I know cause I was lured into renting an apartment with lower rent and a move-in fee of $100.00. Only to learn later, that every six months, there was a MARKET RATE rent increase. After the first year I was paying $150 more each month. I believe in silver-lining, thus for me, this was my wake up call to learn to become an landlord/investor. Rather than be at the mercy of deceitful leasing agents seeking commissions, by picking their renters pockets clean. Which IMO every six months amounted to an illegal eviction.
    Brian Grant Rental Property Investor from Lake Arrowhead, CA
    Replied about 3 years ago
    Great article and comments too. Thanks