The Bubble Market Explained: What It Is and How to Avoid It

bubble market
After the 2007 Financial Crisis, most everyone has likely heard the term “housing bubble.” But, do you know what that really means, and how to avoid a bubble market? Keep reading to find out how. 

What Is a Bubble Real Estate Market?

A bubble is an economic cycle distinguished by the rapid escalation of market value, particularly in the price of assets. The real estate world calls it a “housing bubble” or “real estate bubble,” but they all generally mean the same thing. In simpler terms, a bubble is the name for a sudden spike in housing prices that is fueled by demand—but that spike leads to a quick and inevitable collapse.

How Does a Bubble Market Happen?

Housing bubbles begin with an increase in demand in the wake of limited supply, which takes a pretty long time to replenish and increase.  When this happens, speculative people start pouring money into the market, which drives up demand even more. But, like all bubbles, this one must pop. Eventually, demand will decrease or remain the same, while supply increases as a result of the sharp drop in prices, and Houston, we’ve got a problem. 

Why Is a Bubble Dangerous?

Bubble markets can cause significant problems in the economy by creating instability, and as we saw in 2008, they can lead to major financial crises as loans turn bad and people can’t repay them. Then, as banks try to get back their money, hundreds of thousands of people find themselves at risk of being kicked out of their homes.  When the bubble collapses, it impacts far more than just home valuations, but mortgage markets, home builders, the real estate market, home supply retailers, Wall Street hedge funds and even foreign banks. This all dramatically increases the risk of a nationwide recession. 

How Does a Bubble Market Affect Landlords Versus Homebuyers or Renters?

When supply re-enters the market after the housing bubble bursts, landlords are often left with a large number of vacancies. This also causes property values and rental rates to drop overnight. For homebuyers, a bubble market may seem great as house prices drop. But, you have to be careful and still buy what you can actually afford because when the bubble pops, and your home’s value goes back to normal, you can find yourself underwater on your mortgage, meaning you owe more than your home is worth. 

How to Buy/Sell Properties in a Bubble

If you are trying to buy and/or sell properties during a bubble market, there are some things you must do to minimize your risk, including:
  • Make a hard budget and stick to it: We understand that sometimes you may find a property that you absolutely love, but it’s not in your budget. So you fudge the math to yourself and swear you’ll be able to afford it. You have to stop right there! That’s exactly how we got into the mess, to begin with.  
  • Buy a home where the jobs are so that your property is in a location that is always in-demand. Data shows that when real estate markets start to turn downwards, the properties that experience the least impact are the ones located close to employment centers and major business centers.
  • Work with a full-service property management firm. It’s imperative that you work with an experienced, reputable firm during any market, but especially a bubble market. You need a firm that has chartered this territory before, and that can guide you through the choppy waters, ensuring you don’t get hurt when the bubble bursts.
If you’re looking for a full-service property management firm in San Diego, look no further than Amanica. Our mission is to provide quality, diligent, and trustworthy real estate and property management services. Contact us today and let’s get started.