Investing in a hot market can be exciting. Watching the values of your properties climb is absolutely intoxicating, and many investors spend a great deal of time and energy trying to identify the next hot market before their competitors in order to get in early and make a mint. However, it’s vitally important to remember that a hot market can burn you if you get too close or stay in too long. Fortunately, there is a clear caution signal in most hot markets that will let you know in advance that a correction could be coming.
The signs that a market could be overheating are easy to spot, but they’re also easy to misinterpret as positive signs of growth instead of danger signals. If you see all three of these market trends in the same area, however, be alert.
Signs You Could be Heading for a Local Bubble and Possible Bust
1| Limited Inventory
On the surface, this probably doesn’t sound too bad. After all, if there are not enough homes to go around, you could be the beneficiary of a bidding war! However, if inventory gets too short, say, shorter than two months, then prices can skyrocket out of control and the market may become extremely volatile. For reference, most experts consider six months a “healthy” and balanced housing inventory.
2| Skyrocketing Appreciation
Again, you’re probably thinking that this isn’t so bad. Who doesn’t love it when their properties gain serious value basically overnight? However, skyrocketing appreciation means that a market is about to get less stable due to increased investor activity, possibly the entrance of institutional investors into the market, and the general emotion-over-logic trend that tends to emerge when home values start to shoot upward. This can lead to less predictability and fast changes that could affect your investing exit strategies.
3| Lack of Affordability at the Starter-Home Level
If a market cannot accommodate the financial requirements of new buyers and new household formation, then whatever is going on in that market cannot last. This means even if you invest in other types of real estate, you need to watch your market’s first-time buyers closely. If they’re not buying or, as the case may be, renting, then you are eventually going to have a stall in the market because the entire system relies on the formation of new households that will buy or rent from investors who buy starter homes. Without residents for those properties, everything farther up the ladder cannot sustain itself.
Fortunately, all of this information is relatively easy to track using any number of free data resources available online. You can also check out Think Realty’s news and updates to stay informed about local and national trends.
Read these three other articles to get more insight to real estate investing trends!