How to Know If Your Dream Neighborhood Is in a Housing Bubble

Photo by Gerd Altmann via Pixabay

California has been experiencing quite a demand for its housing in the last few years, with seemingly no community left behind. Understandably, this can make buyers nervous that they're going to buy at the top of the bubble only to see it burst a few years after they move in. We'll give you a few tips on how to spot a bubble, so you can make an offer with both eyes open. 

Home Prices Exceed Salaries 

It's not unusual to see homes in California that are worth well over a half-million — even in areas that may not exactly convey luxury. If the average price of a home is $600,000, but the average income is $44,000, this could be a sign that the market can't sustain itself.

Similarly, if you're seeing a flood of investors, you have to remember that there's always a cap. There will only be so many people out there who have a strong enough income to afford exceptionally expensive homes. The lack of supply in buyers can drive a price down as quickly as it was driven up. 

Plentiful Loans & Inconsistent Interest Rates  

You would think that banks had learned their lesson from the Great Recession, but the truth is that some institutions are still eager to pass out loans during a housing bubble. High-risk loans are likely to lead to foreclosures, which can result in neighborhood deflation.

Buyers should also be paying attention to the local interest rates in the area. The higher they are, the more likely it is that lenders are trying to cushion themselves in case of mass default. Following the predictions for the wider economy may not always be the best idea, especially when the advice can be all over the map. Still, reading up on the state of our collective financial health can make it easier to spot certain patterns and trends. 

A Change in Buyers 

The buyers in the area are a huge indication of a housing bubble. If you're seeing investors flip properties, rent units, and buy up land en masse, it's because they have every reason to believe that the neighborhood is on the rise. If they've abandoned the area, they may have noticed things are on the decline. If tourism rates have taken a sharp swing, it's a good sign the area isn't as desirable as it used to be. 

If you want to know more about a particular area and its bubble status, talking to a real estate agent can help. We can give you a better idea of how an area is changing and what exactly is driving that change.