How To Predict Real Estate Market and Identify Asset Bubbles

Would you like to know what your city's prices will do in the coming year? With these real estate agent tips, you can place yourself in the perfect situation to forecast what will happen to real estate prices in the coming year. Of course, there will be unexpected issues that can affect the real estate market, but by following these guidelines, you can increase your chances of accurately forecasting the market's direction.

There are two main reasons why housing prices can rise:

1) The foundational economy of a place changes. It shows that there is a higher living standard or more jobs available in that area, making it necessary for more people to remain there.

2) Otherwise, it's possible that there's a speculative bubble in which investors purchase at a high-cost today to sell at a higher price tomorrow.

As a successful estate agent, you must monitor economic indicators to help guide your customers and help them in getting the best prices. Through this article, you will start understanding some ideal market indicators to be able to predict prices for real estate in your city.

What are Asset Bubbles?

Asset bubbles occur when the value of certain assets, such as goods (cotton, tulips, etc.), bonds, equities, or real estate, rises above their logical or fundamental level.

The question of 'how to predict the real estate market' arises. How can one tell the difference between a realistic price rise and an asset bubble?

Here are some ways to know how:

1) Interest Rates

Interest rates are a common element throughout every situation in the real estate market. It is debatable whether they are the major cause or not. However, they are no doubt one of the reasons.

All property market booms have been kept constant by low-interest rates. It is because low-interest rates mean there will be an excess supply of money and a situation in which consumers are suddenly full of cash and line up to buy homes.

An abrupt and sudden increase in interest rates has also caused all of the failings in the property market. Rising interest rates are at the root of all crises, from the subprime mortgage crisis to the "lost decade."

An investor should avoid any marketplaces where the increase in property prices appears to be fueled by a falling interest rate. It is because, in most cases, this will be a real estate bubble.

2) Rates of Absorption

Absorption rates show the number of properties bought in the market throughout a given time. This figure is usually estimated based on the number of requests for property title transfers received by the government. A rising number indicates a bull run, while a falling number indicates a bear run.

3) Housing Inventory?

Housing inventory is one of the metrics that investors in real estate can use to determine whether or not a particular market is in a bubble state. The number of unsold properties in a given market is called housing inventory.

In a typical market scenario, a market's housing inventory remains stable. It is because builders get a rough idea of how many homes buyers will buy in a period and will build houses to meet that demand without building too many.

However, if a bull market is coming soon, there is a sudden shortage of housing inventory. It tends to mean that there won't be any available homes on the market! When there is a bear market, there is a rapid increase in housing inventory. As a result, there are numerous homes on the market. However, only a few buyers are interested in purchasing them.

4) Rental To Capital Values

Comparing rental values to capital values is one of the better ways to check for a housing bubble. When the economic fundamentals of specific property change, both the rental and capital values change together.

When there is a bubble, investors raise capital values to get more capital. However, rental values do not rise even though occupants do not see a change in the property's value. As a result, there will be an asset bubble in markets where there is a difference between rental and capital values.

5) Wages To Capital Values

Another way to check the affordability is to make comparisons between the annual wages of a typical resident of a given neighborhood to the capital values common in the neighborhood. The result will tell us how many years a person will need to work to buy a property in a specific area. The average wage is calculated using the median wage of the workers in an area.

Affordability is shown in numbers ranging from 5 to 10. It is because if a person can afford a house with all of their earnings in five to ten years, they can afford one with a 20-year mortgage. However, if the amount exceeds 20, it shows the presence of a bubble.