Blog | Real Estate

Will the Housing Bubble Pop Soon?

History is bound to repeat itself; learn how to reap the benefits.

Summary

• A successful future in real estate investing requires an understanding of real estate history

• Though “real estate market crashes” may seem scary, the bubble bursting isn’t necessarily a bad thing

• Increase your financial education to learn how to take advantage of the real estate market crash, when it happens

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With the recent real estate boom, people can’t help but to wonder how long the market will stay this way. In fact, people are constantly asking about the next real estate bubble.

Philosopher George Santayana said, “Those who do not remember the past are condemned to repeat it.” So let’s take a moment to jog our memories with a brief history lesson — you’ll find out why it’s relevant in a few minutes.

Do you remember the global financial crisis of 2007-08? Of course you do. It was a monumental disaster triggered by the subprime mortgage crisis and collapse of the U.S. housing bubble. It was the worst housing crash in the country's history and nearly caused a second Great Depression. What caused the bubble?

1. Price surge. After the mid-1990s, housing prices went on a sustained surge through 2005 before peaking in July 2006. Residential real estate was not only a great investment, but also seemed to be a very safe one. In some markets, such as Las Vegas and Phoenix, the housing market climbed almost 40% in a single year.
2. Low interest rates. Following the burst of the tech bubble in the early 2000s and the September 11 terrorist attacks, the Federal Reserve drastically reduced interest rates and then maintained them for a lengthy period of time. Because it was so easy to borrow money, everyone did. People bought pricier houses than they could afford because they could get the loans. Eventually subprime borrowers were plagued with too much debt and couldn’t pay their mortgages.

If you’ve ever chewed gum, you know that bubbles can only get so big — then they pop. And that’s precisely what happened: When home prices finally reached unsustainable levels, the bubble burst. A lot of homeowners and investors were caught off guard and U.S. foreclosure filings spiked by more than 81% in 2008.

15 Years Later

Many people were left speculating about the failure of economists and financial analysts to predict the housing bubble and forewarn of its collapse. Everyone is wiser now, possibly scarred from their experience over a decade ago, and on the lookout for telltale signs of another burst bubble. So, will it happen again soon?

There are several criteria we can look at to determine how the housing market is doing in 2023. Let’s examine real-time numbers:

1. Higher housing prices. So far, June is the fifth consecutive month in which home prices have increased across the U.S., according to Bankrate.com. In short, the national composite has risen 4.7%, which is above the median full calendar year increase in more than 35 years.
2. Higher interest rates. Interest rates are on the rise, which means demand for housing could fall. The average rate for 30-year fixed-rate mortgages increased to 7.21% from 6.02% just last year. The higher the interest rate, the less house people can buy — existing homeowners won’t want to buy a new home and leave their lower locked-in interest rates if it means they have to pay more to borrow the same money.
3. Lower inventory. Inventory is low, which has been a problem for years. According to VanEd.com, inventory remains low because of record low interest rates in 2020 and 2021. However, these rates have since skyrocketed.

But wait, could a real estate market crash be a good thing?

Ok, now here’s the answer you’ve been waiting for: Market crashes can be the best time to buy, because people are so panicked and focused on selling that they’re far more likely to make you a better deal.

For example, Robert and Kim Kiyosaki witnessed this first hand in 1991 when they moved to Phoenix, AZ, and began buying properties left and right. Amateur investors wanted out of their financial commitments so badly that they were actually calling them and offering to pay them to take their properties off their hands. They happily agreed and definitely got the last laugh: They made so much money during that time, that they were able to retire by 1994.

Don’t listen to the haters

Although a crash is a great time to buy, the market’s immense pessimism makes it a tough time to do so. Your family and friends, possibly even your financial advisor, will think you’re absolutely crazy and try to prevent you from “making a big mistake.”

People will also be lined up warning that “investing is risky.” However, the important detail to note is that not everyone defines “investing” the same way. Many amateur investors bought into the real estate market when it was hot, prices were soaring, and they invested on the hope that home values would keep going up and up. They probably had plans to flip the property and make a quick $50k. Investing for the purpose of capital gains instead of cash flow is the very definition of risky.

Experienced investors, like Robert Kiyosaki, understand the fundamentals of real estate investing. Investing doesn’t have to be a gamble. Good cash-flow investments are based on having a solid financial education. Knowing and following the fundamentals takes much of the risk out of investing. Sure, there’s always some element of risk, but by sticking to sound investment strategies and planning for ways to cover the downside, the risk can be greatly reduced.

Get Started

Let’s say the real estate market is on the verge of a nosedive, and you’re looking to jump in; here are a few pros and cons of real estate investing before you get started, so that you can be certain whether or not it’s for you.

The pros of real estate investing

Tax advantages

1. Depreciation is an annual deduction that is a percentage of the value of the property that you can write off as an expense against revenues.

2. Tax credits are available for low-income housing, the rehab of historical buildings, and certain other real estate investments. A tax credit is deducted directly from the tax you owe.

3. In some countries, the gains from the sale of real estate can be postponed indefinitely as long as the proceeds are reinvested in other real estate.

Slow

You usually have time to do your homework, make comparisons, analyze the numbers, and make the best investment decision for you.

Experience in real estate ownership

If you can buy your home or personal residence, then you can get into investment real estate.

Home-based business

Include your children in each rental property you purchase. You can learn together!

Leverage of OPM (Other People’s Money)

You may pay 10%, 20%, 30% as a down payment, and a bank, lending institution, or private party provides the rest of the funding. You can own a $100,000 property for just $10,000 or $20,000.

As you get more seasoned and sophisticated, you can leverage OPM for the down payment as well.

Cash flow

If the property is purchased and managed correctly, real estate can provide tremendous opportunities for cash flow.

Appreciation

(an increase in the value of the property over time) - If you manage the property well, your rents will increase. When your rents increase (or your expenses go down), the value of the property appreciates. Cash flow and appreciation are two forms of revenue from rental properties.

Control

You have control over the income, expenses, and debt of your properties.

Not as subject to the fluctuations of the markets

A cash-flowing property is not subject to the daily ups and downs of the markets. It is typically a long-term play; this is why a down real estate market can actually be the best time to buy.

The cons of real estate investing

Time lag

Offers, counters, appraisals, inspections, financing—they all take time.

Not liquid

Liquidity is the ability to convert an asset to cash. You cannot get in and out of real estate quickly.

Difficult

Of the five asset classes, real estate is the second most difficult (after business). You must also deal with vacancies and bad tenants at times.

Time-consuming

It takes time to find a good deal. Properties must be managed on a daily basis.

So, will the market crash in 2023?

Though, we can’t say for certain if we’re truly in a bubble yet or that is about to burst, knowing that history tends to repeat tself does help to keep future investors on guard.

Don’t be threatened. There’s no time like the present to start preparing for bad times, and having a solid financial education is your best offense.