Understanding Real Estate Bubbles

Real estate bubbles occur when a market is over heated and people are still investing in property for profit, but the supply is on the verge of out pacing the demand for homes.

When it comes to real estate, the basic laws of supply and demand can teach us many things when it comes to investing our money. Real estate has been one of the best markets in which to invest money and to see a profit in a short period of time. As in any other market, it will increase and decrease in both the supply and demand.

Lots of people can make tons of profit buying investment properties to resell at a later date, during a major growth cycle in real estate prices, when demand for living space is out pacing the supply of homes. With the record low interest rate of the past few years, we have experienced a major boom cycle in real estate. Investors have experienced record profits, as people began looking to upgrade their homes and to buy vacation homes for themselves.

New homes builders got into the game building more new homes at record rates. Real estate investors got into the boom themselves, buying older properties and investing the money to improve the value of the homes.

As it seems, in an average year, any home that goes on the market will be available for between 4-5 months, before the home sells. During the recent real estate boom, it seemed that many markets were experiencing a window of only a few days, between when the home went on the market and when a buyer was signing the contract.

What happens is, that the buyer has been on the house hunt for so long that when they finally see a house they want, they offer to sign a contract immediately, to make sure that they do not lose out on another desired home purchase. This is what we call a true seller’s market, where the seller holds all of the cards and the buyer is at the mercy of the seller and the market.

When the demand is strong and the supply is small, we see record turn around times on home sales, and we see real estate prices increase at double digit percentage rates. We see growth and we see slow downs. The trick to hugely profitable real estate investing is to get in while the prices are rising at staggering rates. But, what often happens is that the late comers in a real estate boom will pay exaggerated prices for a home, and then get stuck holding the bag when the bottom falls out or when the supply outstrips the demand and prices for homes begin to drop.

This is what some refer to as the real estate bubble. If an investor is to be successful, he or she needs to get in and get out of the market, before the real estate bubble bursts. If you are smart, you can spot the bubble while its developing. And if you can foresee the burst of the bubble, you can get out of the market with your profits intact.

Many individual investors make the mistake of seeing the signs of a bubble market, and not taking steps to avoid loss. If the time between the listing of a home and the sell of a home begins increasing, then that is a sure sign that the real estate market is cooling. Given that during a normal year in a normal market, the average turn around time is 4-5 months from the listing of a home to the sale of that home, we have a solid marker for determining how soon we should expect the bubble to burst.