The Real Estate Bubble

The real estate bubble is what happens when real estate values rise extremely sharply, which results in an over-inflated market. Buyers spend well over usual property prices, afraid however that the bubble will burst and prices will drop just as suddenly as they rose. This is a very risky time to be a real estate investor.

Sometimes it is hard to tell the difference between a real estate bubble and a hot market. Experts can usually tell us which parts of the country are experiencing a bubble, however experts still have trouble explaining the difference between an unstable bubble and a less risky boom. Some organizations such as mortgage companies produce reports on the market, which can help you to spot which cities may be in the middle of a bubble – which may be about to burst.

Buying during a real estate bubble is risky, especially if you have low equity in your home. That is, if you still have a lot of the mortgage to pay off, then you have a sizeable debt to pay, and if the bubble bursts, then the property will not fetch enough when sold to cover that debt. This is only an ‘on paper' loss if you don't sell the property, however. Property rises frequently go up and down, so if you don't have to sell, then you can wait until prices go up again, and thus avoid the loss. If you do have to sell when prices are low though, then you are in a negative equity situation and this becomes a problem when you want to buy another home.

If however you have greater equity or have enough capital behind you to weather the loss, then the burst bubble is not such a potential disaster for you.

If you have a moderate income and are looking to buy in an area which is experiencing a bubble, then be sure to do some research first, weighing up all the pros and cons. Keep an eye on the market for a couple of months and take note of variations, sale trends and what the experts are saying about your chosen area. Then put all this information together and decide whether the points in favor outweigh those against, or not.

You should also use your common sense in a bubble situation. Make sure your debt is minimal, in case you have to move when it would be better to wait for a price rise. Invest in improvements to your home which will increase its value, and resist impulse buys and luxury purchases. Experts say that if you remodel your bathroom or kitchen you can recoup 80 to 90% of the cost when you sell. You should also protect yourself from plummeting prices by buying a property which has excellent re-sale potential.