You may not know what a housing bubble exactly is, but you do know one thing about it: it’s not good. The term brings back bad memories of the recent recession that started between 2007 and 2008. A decade later, many housing markets have recovered to reasonable prices. Others, however, seem to be heading towards a new housing bubble.
Related: What’s the difference between a housing bubble and inflation in US real estate?
Housing Bubble In a Nutshell
Before we can talk about the cities leaning towards another housing bubble, let’s clear the air about the concept.
A housing bubble is a situation when housing prices in a real estate market increase well-above average. Property prices do not merely rise in a real estate bubble; the prices rapidly increase, making real estate properties virtually unaffordable in the future.
What Caused the Most Recent Housing Bubble?
Financial bubbles, like the real estate crisis of the mid-2000s, are usually triggered by other major financial predicaments. A previous stock market bubble, called the dot com bubble, saw many investors abandon the stock market and head towards real estate investing. Real estate prices then began to increase, as demand warranted. This rise in home values was not a matter of concern. That was the case, until interest rates had lowered, and the real estate market was essentially deregulated.
As high demand, low interest rates, and deregulation continued, more people began to take part in the real estate investing business. The problem was, however, that most of these real estate investors would have been unable to afford these investment properties had conditions been ordinary. These real estate investors were known as subprime borrowers. They constituted more than half of all investors which is extremely alarming.
High amounts of speculation into property values ensued. Many of the country’s main housing markets became too overvalued. People were no longer able to afford their homes, and demand suddenly fell. These factors, along with others, caused the bubble to pop. Massive foreclosures, debt, and economic downturn followed.
More than a decade has passed since the national housing bubble. Nationwide, real estate markets are recovering or have recovered. Even with some cities (to be mentioned shortly) heading for a bubble, the country, on a national level IS NOT near another housing bubble. There’s no need to panic. Just be extremely cautious if you consider investing in these cities for now.
Cities Potentially Heading for a Housing Bubble
Denver, CO
For a while now, Denver has been considered an underrated city for real estate investments. While it does offer existing real estate investors impressive returns, it may not be the best place to purchase a new rental property, at least right now. According to CoreLogic, Denver’s real estate market has had a whopping 8.7% annual gain, making it one of the most rapid increases in value in the country. Prior to this sudden rise, Denver’s housing market had a 12% gain in four years, which is pretty moderate. Overall, since August of 2006, property prices have jumped an amazing 38%.
Portland, OR
Portland’s housing market has had a massive overvaluation since the last housing bubble. According to CaseLogic’s Case-Shiller Housing Price Index, property prices have increased by 20% since the last bubble. If you backtrack to the last 5 years, property prices have climbed over 70%. If you thought that was insane, wait until you read this. During the last 17 years, Portland’s housing market ballooned a ridiculous 123%. Stay away from Portland for some time.
Dallas, TX
The Dallas-Fort Worth area’s housing market has been attractive to real estate investors for many reasons. Its population is one of the highest in the country, and migration to the city has only increased. The real estate market was also not severely impact by the last housing bubble. Property prices increased by 13% for 5 years, which isn’t too bad considering the bubble. However, income property prices have been kicking up for a while, partly due to the increasing population. It seems the housing market is becoming overvalued. The Case-Shiller Index states that year-over-year, Dallas’ property prices have increased a little over 7%.
Seattle, WA
Seattle has been one of the best cities for real estate investments for a while. This is especially true with Airbnb rental properties. As a matter of fact, according to Mashvisor’s data, Seattle has one of the highest Airbnb occupancy rates in the country. Investing in Seattle real estate has been encouraged for many years, including the current year. Unfortunately, the housing market has shown signs of overvaluation. Its index has significantly increased by over 20% since the last housing bubble.
Are San Francisco and New York City Still Overvalued?
What about 2 of the most overvalued cities in America? How are San Fran and The Big Apple doing regarding a housing bubble?
Let’s start with the hottest market of them all – San Francisco. San Fran has been one of, if not, the most expensive rental market in the country. Is it nearing a housing bubble? If so, will it burst? To answer the first question: No. On the contrary, SF’s housing market is now considered at value. Property prices were only up 5.3% over the last year. While property prices are still expensive compared to most US cities, when local dynamics are factored in, SF’s hot market has started to cool down.
Related: When will the US housing market prices go back to normal?
What about New York City? Aside from the disastrous housing bubble, NYC has had its real estate problems. This is most evident with short-term rentals, particularly Airbnb. Its harsh legal framework has essentially shunned away Airbnb investors. Its overvalued market turned away traditional investors, too. As of right now, however, the housing market is now considered sustainable. NYC’s real estate market increased about 3% over the last year.
The housing market, overall economy, and the lives of many Americans were drastically altered due to the last housing bubble. Real estate markets are now recovering, while others are starting to become overvalued again. But remember, what matters the most is the local market of an investment property. To find the best investment properties in your local market, start your property search trial with Mashvisor!