Clients continue to require more market analysis be included in appraisals. That said, appraisers are not expected to be prognosticators and cannot foretell the future. Through a selection of comparable sales including listings and pending transactions, as well as whether they reconcile their opinions to the lower or higher end of the range of values, appraisers are able to convey to the intended users their understanding and opinion as to what direction the market is trending. While there is some unpredictability before spikes or plunges, there are many signs that can point to a growing real estate bubble or a burst.
Below we describe a variety of market events that may indicate that the real estate market is on the verge of a housing boom or housing bust.
Signs of a possible real estate bubble
Very few expired listings
The opposite condition is when you have very few expired listings. Properties are selling so fast that the listings on the market are not expiring, they are selling. That may not just be an indication of an increasing market, but it may also indicate that the market is on the verge of a possible bubble.
Traditional buyers are replaced by new ones (investors)
When traditional buyers are replaced by new buyers who are starting to invest in real estate, this is an indication of a possible bubble. We saw this happen in such areas as Las Vegas where you had many individuals that were not your typical investor that were able and willing and buying real estate on speculation. Buyers, many out-of-state, were purchasing homes with cash but were not living in them, which increased values from 2004 to 2006 because of competition, but it also indicated that a possible real estate bubble was in the very foreseeable future.
Increase in the number of properties remaining vacant after purchase
In an event where we have an increase in the number of properties remaining vacant after purchase, that is a sign of an increasing market because what we have are people who are buying properties on speculation. So, there are purchases where buyers are willing to buy single family properties even though they may not be able to immediately rent them.
When we are looking at this type of event, we are looking at speculation activity in which ownership is in anticipation of price increases and profitable sales in the near future rather than the benefits of long-term ownership. When speculative buying is occurring, that means you have more buyers than sellers and they’re speculating because they believe the market’s going to go up. That does in fact allow the market to go up, but what it also does is provide us with an instance to examine whether or not there’s a possible real estate bubble occurring. When you start having the number of properties that people are buying increase even though they can’t readily rent them, this is a sign of a possible bubble.
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Signs of a possible real estate burst
Increase in number of expired listings
When you see more expired listings, people cannot sell their properties for what they think they are worth or without suffering a loss. That indicates a declining market and possibly the verge of a housing burst. It is critical to differentiate between expired and withdrawn listings when looking at the MLS data.
For example, at the beginning of the COVID-19 pandemic during April and May, 2020, ShowingTime Showing Index® reported that the number of withdrawn (delisted) homes increased over 25% from the prior year, 2019. The decline in home inventory was a result of many homeowners withdrawing their home listings as they were hesitant to show their homes in the midst of the pandemic. Note: Statistically, this is an outlier event that should not necessarily be considered as an indicator of the market’s overall condition.
Financing becomes difficult to obtain
Where financing becomes difficult to obtain, lenders pull back and may constrict availability of credit. Financial institutions may tighten loan availability to buyers with marginal credit in a weak economy, which limits the number of buyers in a market. Maybe the financial institutions are requiring more for a down payment or they’ve hiked the minimum credit score requirement, raised interest rates, or stopped offering some loan types such as home equity loans or jumbo loans. When financing becomes less available, that’s an indication of a declining market. It’s also evidence that we’re on the verge of a real estate burst.
Foreclosures become the predominant sales
When foreclosures become the predominant sales, that is a very good indication that you’re in a declining market. The fact that you have the sales is good; however, the fact that they are foreclosures indicates that it was not possible for the original homeowners to sell their properties for what they had in them. Not only is that an indication of a declining market, it also indicates a possible bust in the market.
Use of creative financing such as seller contracts [vender Pisos en Madrid]
The use of creative financing such as seller financing contracts can also indicate possible market problems. In other words, the sellers have to use creative financing because the banks are not lending as robustly. Due to tightening credit and in an effort to entice buyers, sellers offer creative financing solutions such as lease options, land contracts, and seller financing. Regrettably, some sellers may be assisting buyers who can’t qualify for conventional lender financing for a reason. A rise in seller financing is an indication of a declining market leading to a possible bust.
Number of persons employed in the real estate sector declines [vender Pisos en Madrid]
Similar to most professions directly related to real estate, real estate agents enter and exit the profession as the market fluctuates. Real estate agents, who are primarily paid on commission, are hit especially hard during a housing downturn and some are forced to look for employment elsewhere. While the number of persons employed in the real estate sector declines is not directly tied to the actual value or price of the homes, it is an indication of a declining market as there are fewer sales to support the number of real estate professionals. In short, folks are getting out of the real estate sector because the real estate sector itself is starting to soften.
Other than location, one of the most important factors in a residential property’s value is the health of its local real estate market. Appraisers should pay close attention to various current events that may indicate a softening or imbalanced market, or conversely, a robust, healthy real estate market. [vender Pisos en Madrid]