10 Signs of a Real Estate Bubble

Dr. Joel J. Napeñas

3 minute read

What are the signs of a real estate bubble, and are we in or heading towards one?

With current prices of real estate assets at, what seem to be all time highs, you may wonder whether now is the right time to invest.

John Burns is a leading analyst and consultant with expertise in the US housing industry. His firm has come up with his indicators of market bubbles since its establishment in 2001. Some of the indicators, both qualitative and quantitative, and whether they hold true today (early 2022) include the following:

1. Multiple homes for everyone – When your nanny, hairdresser or bartender has multiple homes and folks are fighting to get on the VIP list for the next community. – NO

***“I have 5 homes and a condo…”*** – Steve Carrell’s reaction in the movie “The Big Short” when an exotic dancer tells him of her multiple homes with adjustable rate mortgages and only 5% down.

2. Creative mortgages – When home mortgages include interest only, 40 year amortization terms, 100% loan to value, no documentation or income verification. – NO

3. Truck stop feasibility – When sales are hot in places where you may have only stopped off the side of the highway to put gas in. – YES

4. Reality TV – When Flip This House is the hottest show, and builders are giving away free houses on reality TV. – YES

5. Very high supply – When construction volumes approach record highs. – Currently, the case is the exact opposite as there is a shortage of 3-5 million homes nationally – NO

6. Waning demand – When annual job growth is less than annual construction. – NO (Depends on market)

7. Very poor affordability – In general (with the exception of some markets), prices are within reach compared to median income, but it getting more challenging for entry level buyers – NO

8. Rising home equity cash out – When more people take out home equity line of credits than normal – YES

9. When mortgage defaults and adjustable rate mortgages are rising. – NO

10. Falling sales – When trailing 12 month sales begin to trend down and cancellation rates for contracts increase. – NO

While there are a some indicators showing that the market is frothy, more show that we are not quite yet in a bubble.

While the saying goes that ‘real estate markets are local,’ one must also look at these indicators in the individual markets they are in, and when considering investing or buying real estate there make sure they are supported by fundamentals such as: median income; employment and growth and diversity and; population growth.

At the individual investment level, you are at less risk of being a victim of the bubble as long as: cash flow is a significant component; the deal is not overly leveraged (e.g.: less than 75% financed debt) and; you are not only relying on appreciation.

Therefore is it still a good time to invest in real estate? It still is, as long as you invest in the right deals, in the right markets, with the right partners and in cash flowing assets.

Dr. Napeñas, a practicing academic dental specialist in Oral Medicine, is founder and managing partner of 5DH Partners, a real estate investing firm that educates and helps dentists and other professionals generate passive income and build wealth through investing in real estate.

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