Many have hailed the last few years as the best time to invest in real estate. Despite the US residential real estate market’s impressive success and recovery, one worrying question lingers in the back of every real estate investor’s mind: When is the next housing bubble? Specifically, will the US real estate market 2019 be the time another bubble forms?
What Is a Housing Bubble?
Before we discuss the housing market forecast for 2019, let us review what a housing bubble is. Generally speaking, a bubble occurs when an asset’s prices increase to rapid and virtually unaffordable levels. As it pertains to residential real estate, a housing bubble occurs when property prices rise to unsustainable levels. Demand plummets as a result, and the housing bubble eventually bursts or becomes a housing crash.
What Are the Causes of a Housing Bubble?
Real estate is generally not as susceptible to forming a bubble compared to other assets, like the stock market. This is because of real estate’s heightened stability over these assets, primarily due to its considerable transactions and carrying costs, such as mortgage payments and property taxes. However, when a real estate bubble does form, it is typically longer lasting than that of other assets.
The first step in bubble formation is increased interest in an asset. With real estate, this may include low interest rates, high demand, and little credit requirements. Demand booms as a result and property prices increase unsustainably. A lack of proper oversight or deregulation of the asset further expedites the boom, leading to a period of euphoria. However, as demand decreases while supply increases, the bubble bursts, leading to a crash.
What Caused the Most Recent Housing Crash?
It has been a decade since the last housing crash. The 2008 housing crash, and its preceding housing bubble, followed typical asset bubble trends.
From 2000 to 2006, the US real estate market was in a period of euphoria. Coming off the recent dot-com bubble and resulting stock market crash, investors took interest in the rising value of the housing inventory. With this continued interest, supply and demand for real estate grew.
Inherently, this was not an issue. The problem began and amplified, however, as a result of lax lending requirements. Interest rates, for instance, nosedived during this period. Mortgage lending was essentially deregulated. As a result, many people who were unqualified under normal circumstances to buy property were now able to do so. Over half of all property buyers fell in this category and were appropriately referred to as subprime mortgage borrowers.
Subprime lenders and borrowers took advantage of the little-to-no lending requirements, typically using zero-down mortgages and adjustable-rate mortgages. These loan types, and zero-down mortgages in particular, now come with high interest rates and credit standards, but they did not during this period. Interest rates were then spiked in an effort to offset the low standards, but the damage was already done. When this became the norm in many major US markets, the housing market forecast became bleak. Demand began to decrease. The housing bubble then burst, which led to massive foreclosures, high debt, unaffordability, a housing crash, and a nationwide recession.
Fortunately, the majority of the nationwide markets have recovered from the 2008 housing market crash. Some markets, however, are still stuck in the recovery process. To learn what these cities are, check out the link below.
Will the US Real Estate Market 2019 Be a Housing Bubble?
This all leads us to the main question of this blog: Does the US real estate market 2019 housing forecast anticipate a housing bubble? Fortunately, the answer is no. However, an overall economic recession is projected to take place in 2020, according to a recent report by Zillow. The good news, as it pertains to real estate market trends, is that the housing market will not be the culprit this time around.
Why Won’t There Be a Housing Bubble in 2019?
According to Bill Conerly of Forbes, there will not be a housing bubble in 2019 because construction is not projected to exceed relative population growth. In other words, the US real estate market 2019 will not have an overbuilding issue. Conerly uses the accurate standard of 53 housing units per 100 new residents to show that the national market is meeting the demand of real estate construction. During the recent housing bubble, 2.3 million new properties were being built annually, which was considered overbuilding. That number has fallen to 1.3 million as of late.
Although property prices have been rising during the last few years, this does not indicate the formation of a housing bubble. The main reason real estate development and property prices have risen, on a national level, is due to an increase in the value of land. This increase in value is tied with the limited supply of land. As a matter of fact, housing inventory prices are expected to slightly decline from the recent 6.5% rate during 2019. With a downtick in population growth, increase in interest rates, slight decline in housing construction and prices, it is projected that no bubble will form in 2019.
What Are Some Ways to Protect Yourself from a Housing Crash?
Thankfully, the 2019 housing forecast predicts no housing bubble. But that does not mean you shouldn’t protect yourself from a potential crash. Here are some quick tips to follow:
- Focus on positive cash flow properties
- Diversify your investment portfolio
- Pay your mortgage and build equity as soon as you can
- Use an investment property calculator
Related: How to Recession-Proof an Investment Property
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