How to Identify a Bubble or Bust Housing Market

by AppraisersBlogs · Published September 17, 2013 · Updated June 14, 2022

ow to Identify a Bubble or Bust Housing Market

Bubble or bust?

The nation’s home prices continue to climb, with some cities posting double-digit annual growth rates during 2012–13. While the continued economic recovery seems to trend in a positive direction, consumers, appraisers and other market participants should be on high alert for red flags that could signal the possibility of another housing bubble in the near future.

How can appraisers tell if the current housing market is “bubble” or “bust”? Here is some guidance from the Appraisal Institute’s “Guide Note 12: Analyzing Market Trends.”

Appraisers should be able to spot the symptoms of a changing market. Appraisers and other market participants can usually identify a “bust” housing market easily. Recognizing a housing “bubble” when in the midst of one, however, can be more challenging.

A “bust” housing market may be indicated by symptoms including, but not limited to:

Increases in the rate of foreclosures to the point where foreclosures become the leading type of property sale.
Tightening credit markets, making traditional financing more difficult for borrowers to obtain.
Increases in the number of expired property listings.

A housing “bubble” may be indicated by symptoms including, but not limited to:

Buyers who seem to be more emotionally involved and act irrationally, contrary to the market value definition.
Home prices increasing at a faster rate than rental rates.
The number of properties that remain vacant after purchase increases.

The appraiser should also understand the underlying causes of those symptoms in order to properly evaluate market trends. Factors that cause a changing market may include:

Public policy changes related to monetary policy and government spending, taxation, interest rates, and the availability of financing for borrowers.
Inflationary/deflationary pressures on the regional, national and global economies.
Changes in technology such as green buildings, cloud computing and e-commerce, which affect employment patterns, new industry formations and new property types.
Changes in affluence and income distribution that influence affordability and consumer spending habits.

Appraisers can also look to consumer confidence data when analyzing housing market trends to determine if a housing bubble could be imminent. According to the Fannie Mae August 2013 National Housing Survey results released Sept. 10, Americans expect home prices to continue to grow 3.4 percent on average during the next 12 months — down 0.5 percent from July.

Additionally, the survey results revealed that consumers who say it is a good time to buy a house decreased 3 percentage points to 71 percent in August, and those who say it is a good time to sell a house fell 4 percentage points to 36 percent; however, 46 percent of respondents think it would be easy for them to get a home mortgage, a slight increase from July.

~ Source Appraisal Institute (AI)