Is America’s real estate bubble on the verge of bursting in 2022—or is that just a false assumption put forward by the media? Let’s find out.

 Table of Contents 

  1. What Is Happening With the Housing Market?
  2. What Is a Real Estate Bubble?
  3. Signs That Suggest a Real Estate Bubble
  4. Tips on Avoiding a Real Estate Bubble 2022
  5. Final Thoughts

 The state of the housing market, as comprehensive and vast as the US one, can often be unpredictable—and understandably so. Trends and prices regarding all types of real estate are constantly rising and falling, which, in turn, influences buyers’ behaviors and their investment strategies, in general.

However, what recently emerged as a major concern is the so-called real estate “bubble.” In brief, it is a term that describes the rapidly rising prices—which affect further demand and supply and cause homeowners to take a step back.

What’s even more concerning is that many predict that the said “bubble” will burst.

There’s no denying that there’s something big going on in the US real estate market. But to learn more about the current state of that “bubble,” some of the signs that it might burst, and see whether it is true or just false news, you’ll need to continue scrolling.

What Is Happening With the Housing Market?

First off, let’s get into the news reports that raised some speculations regarding the current state of the real estate market.

It seems like the all-encompassing US housing market is starting to show some major signs of vulnerability.

Is this true, though? Is the housing market bubble bursting?

The report that started the fuss indicated that prices of houses seemed to be rising fast. And it can, in turn, be linked to the decreased number of prospective homebuyers looking up listings and scheduling house tours to view potential properties.

Mortgage rates are the one factor that’s raising particular concern among investors. According to the Federal Reserve, a fixed 30–year mortgage rate in December remained at 3.11%. The number skyrocketed over the past few months, reaching a shocking 5.27% in May 2022.

Without exaggeration, it’s the highest mortgage rates were since 2009. Of course, nobody would like to go back to that period—and experience the market crash all over again. The rising mortgage rates are contributing to a steady build-up of additional pressure among investors and consumers alike. The higher rates make it harder to apply for a loan and even harder to repay it within a respectable period.

It’s no secret:

A significant number of investors who might’ve been in good standing in December are probably losing their loan eligibility due to the rising numbers. What created a shock among homebuyers is that, during the outbreak of COVID-19, the mortgage rates were almost unimaginably low in the US compared to what awaited them two years later.

Granted, house prices increased by 34.4% during the pandemic, but the historically low mortgage rates still shielded homebuyers to a degree. It is now changing, though.

The shift will continue until the housing market prices finally reach their limit and the market overheats—causing the “bubble” to burst or cool down.

What Could Be Next?

With both scenarios in mind, experts offer us two viewpoints of what could happen:

Over the next few months—or possibly the beginning of the next year—a 5% to 10% decrease in mortgage rates is possible. However, there will still be properties on the market that will sell at a higher price.

Phoenix and Charlotte are at the top of that list when it comes to specific markets that are most likely to see a rise in home prices. However, it should be noted that this is all fluid—and you should not turn your attention only to these two.

According to the latest statistics, 96% of the housing markets are deemed to be overvalued right now—and that covers every single one of the US’ largest housing markets.

Overall, looking at the housing market predictions 2022, there are undeniable signs that we’re currently going through a fundamental shift. While there is no reason to worry about a full-on collapse, the market is in “cooling mode.”

Related: Mortgage Rates Watch: May 2022

What Is a Real Estate Bubble?

In the introduction, we rightfully prioritized the news that made headlines over the past few weeks and occupied the attention of real estate investors and buyers who are researching the housing market.

Now, it’s time to turn to the theoretical part of the market—and explain what we mean when we mention this type of “bubble.”

By definition, a housing bubble (as many call it) is a term used to specify a time or period of unexpected and rapid growth in mortgage prices and housing demands. It’s an undesirable time for investors, and it occurs when the supply of houses on the market is not enough to meet the actual demands. And when there is a limited choice on the market, housing prices and mortgage rates tend to spike up.

So, we’ve discussed “is real estate in a bubble.” Although the answer suggests “Yes,” there’s still a chance for the numbers to cool down.

What happens if the bubble pops, though?

Suppose that the “bubble” pops. In such a case, homebuyers can find themselves in the hustle and bustle of prices and mortgages that break through their budget. On the flip side, you’ll see investors who will either decide to sell their properties for less than they’re worth or the properties will remain unsold. Either way, investors are left without any profit.

While we’re on the topic of housing bubbles, it is important to say that no two are exactly the same—especially not in terms of characteristics and duration. While it can calm down after a few months in some situations, in others, it can last for a whole year.

So, while researching is there a real estate bubble, make sure that you’ve checked the numbers twice. And that goes for both investors and buyers.

2005 Housing Bubble Explained

Everything we’ve discussed so far has been theoretical. Now, it’s time to look at and mention a concrete example of the crisis—one that dates back to 2005.

During the 2005 US housing crisis, fund managers spurred demand for the so-called “risk-free securities.” Consequently, it boosted the demand for mortgages. To meet the demand and help stay “afloat,” lenders and banks contributed by allowing loans to everybody and anybody who applied for one.

That was, in fact, the number one mistake that fueled the crisis.

As you know from the previous passages—and your knowledge, of course—that it significantly drove up housing prices and interest rates. All of the mistakes led to the 2007 crisis regarding mortgages, finally leading up to the global financial crisis in 2008.

Now, you might be wondering if and when will the housing market crash?

Bearing in mind the statistics we’re up against on a possible housing market crash, we’d say that we’re still in the green area—or the safe zone, if you will.

Signs That Suggest a Real Estate Bubble

After explaining the essence behind “housing bubbles,” the next thing we need to clarify is the signs and hints that suggest a real estate housing bubble is, indeed, what we’re dealing with here.

Without further ado, let’s list them one by one:

Decline in Economic Growth

The first sign—and possibly the most comprehensive one—concerns the general economic situation of the country or the market in question.

Economic decline (or economic collapse) is a state of crisis in a country, accompanied by traditional, regional, and national breakdowns. In other words, it is the first step toward economic depression or recession.

Just as the economic collapse can happen at any time during the economic cycle, it’s also important to mention that there’s no manual or guide on how to deal with it.

As for reflecting on the crisis and standing in its path, most of it is up to the lenders and the official government. Several rules can be introduced—mainly new controls regarding capital, evaluating currencies, and altering banking systems.

Rising Interest and Mortgage Rates

The next thing we would like to draw attention to is what we’ve already mentioned as one of the important indicators—the rising interest and mortgage rates.

As mortgage and interest rates continue to increase at an alarming rate, homebuyers are less willing to view homes and apply for mortgages. High rates reduce their ability to repay them within an agreed period; it’s as simple as that.

Even more so, the high fixed mortgage rates leave them with little to nothing left to deal with other expenses.

Related: How Is Inflation Affecting the US Real Estate Market?

Confidence Among Homebuyers Declining

With increasing rates, consumer confidence is more likely to decline.

Understandably, people will not want to indulge in purchasing homes, apartments, or condos if they are not sure that they will be able to cover the monthly mortgage payments on time.

And that directly affects demand.

No matter how confident investors are in their strategy or persuasive power, even a fantastic offer cannot pass if the numbers are still above someone’s budget average.

Rising Number of Foreclosures

Another in a series of signs that suggest that you’re dealing with a real estate “bubble” is the increased number of foreclosures on the market.

When it comes to the housing bubble in the US, a rising number of foreclosures doesn’t look good—especially if you’re a buyer.

It happens when homebuyers proceed with purchases—despite the evident rise in mortgage rates—and fail to meet their payments. The lenders have the right to take full ownership and even sell the property for compensation that the owner was unable to provide.

During the crisis, foreclosures can affect the market as a whole because lenders face the opportunity to sell a house that’s in a fairly good state for much less money.

At the end of such a troubling period, foreclosures do not need to be negatively anticipated. On the contrary, they allow investors to enter with as little investment as possible and come out with more profit.

Taking Out Equity Loans

Looking back at the timeline, before the crisis that hit the US market in 2008, lenders largely supported homeowners to take out equity loans. Such types of loans cover college tuition, cars, and the like. Since the economy was strong, repaying the loans was not a problem.

However, after home prices stopped rising, people could not cope with their bills. So, now, people owed much more than they owned—which was a huge obstacle.

With such shaky foundations, it’s easy for the disagreement between lenders and buyers to grow into something more. And it can leave the homeowner without the property and in legal trouble.

Related: 3 Crucial Tips on Using Hard Money Loans for Real Estate Investments

Tips on Avoiding a Real Estate Bubble 2022

There is no direct formula or guide that can guarantee with certainty that there will be no market crisis. But you can still do some things about it and hopefully avoid the worst-case scenario.

Here are some tips we find useful and that will surely be of help to investors in their future market research:

1. Take Care of Liabilities

Before you dive into the real estate investing business and start building your investment career, focus on paying off your existing debts and liabilities. Taking care of substantial liabilities will help you cope more easily with financial obligations that are yet to happen.

In the event of a market crisis, it will certainly not be easy for you, but at least you will have a relatively solid leg to stand on. The chance of paying off your real-estate-related debts is much higher once you take care of everything else that’s been accumulating over the years.

2. Make Fixed-Rate Mortgages Your Choice

We agreed that the increase in mortgage rates is by no means desirable—for investors or for prospective homebuyers. So, how do you deal with such unfavorable numbers?

The numbers will keep rising; there’s no doubt about that. But what you can do is opt for the one that carries less risk—fixed mortgage rates.

Sure, if you opt for a fixed mortgage rate, you might end up paying more. But once a certain number of years have passed, you will be debt-free—and the property will entirely belong to you.

On the other hand, choosing adjustable or variable mortgage rates puts you at risk, where your monthly installment can be reduced or increased drastically depending on the market.

Real Estate Bubble - Fixed-Rate Mortgage

Fixed-rate mortgages are a better option for prospective homebuyers, as they carry less risk than variable-rate mortgages.

3. Know Your Budget Limit

We can’t stress how necessary it is to know how deep your pockets are when it comes to real estate investing. And we’re not just saying that for the sake of it. Budgeting is the first step toward investing and buying a home.

Different investors use different ways of financing. Some opt for personal savings set aside explicitly for such purpose, while others choose to rely on mortgages from lenders.

Needless to say, when it comes to financing, it is always better not to depend on a financial institution that can seize your property. Then again, failure in the middle of a market crisis could leave you penniless.

So, always do the math first—twice, if needed.

4. Get a Guarantee

In case you have your savings, it makes sense that you want something that’ll be resilient to a market crash—in case one happens. For this reason, you should own investments that will not sink along with the housing market.

There are two options here. If you’re mainly interested in long-term investments, it’s best that you hold fixed annuities or universal life insurance products. It will help you generate income—even when times are rough.

On the other hand, if short-term investments are your main preoccupation, you should turn your attention to Treasury securities.

Final Thoughts

We managed to cover crucial information regarding the real estate bubble that’s been hotly debated for some time now.

Let’s see what we know so far.

The first things that real estate investors should pay attention to are the numbers and reports found in reliable newspaper articles. One such example would be the rising mortgage rates and housing prices in 2022 that have announced the pop of the so-called “housing bubble.”

Although there’s no official date of when will the real estate bubble burst, experts predict that the market crisis is likely to affect the US housing market if property prices continue to rise. And in addition to that, there’s no indication of how long it may take for the market to cool down.

Some possible signs that suggest such real estate danger are:

Rising mortgage and interest rates, the general decline in the economic power of a country, less confidence among homebuyers, an alarming number of foreclosures, and equity loans.

While there is no proven guideline to get you through the crisis, there are some precautions you can abide by—and save yourself from the worst-case scenario.

Some helpful tips include taking care of any previous liabilities, estimating the risk and your budget, and opting for a fixed-rate mortgage.

There’s only so much one can do here. But you will still save yourself from the additional risk by getting familiar with everything related to the current state if the housing market.

There’s one more thing you can do:

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