How to Predict a Real Estate Market Bust

When house prices are dropping, big real estate lenders are declaring bankruptcy, and the number of foreclosures is rising, financial analysts begin to predict that the real estate market is about to tumble. Here’s how to recognize the indicators predicting a big deafening crash.

Instructions

Difficulty: Moderately Challenging

1. Remember the dotcom investment bubble in the 1990s when everyone you met at parties was talking about the high-flying stock on which they’d made a killing? Listen now to those same people talking about how much their houses have appreciated and all the money they’ve made on real estate.
2. There will be times when everyone wants to be a property speculator. "Flipping" properties can become so popular that you hear about it everywhere and people start dreaming of the millions they can make.
3. Economists look at the housing market and say property prices are disconnected from fundamentals such as rents and salaries and have no option but to fall.
4. Economists and realtors say a home should sell for about 150 times the monthly rent the property is capable of earning.
5. Typical middle class salaries can’t cover mortgages except by using adjustable interest-only loans. If buyers don’t make a down payment on their home purchase they have no equity in their homes. If interest rates go up then there are sure to be problems with people defaulting on their loans and flooding the market with properties.
6. When buyers borrow more than they can ever repay, and overpay on expensive houses, using interest-only loans and other “come-on” borrowing packages, the number of foreclosures will rise. This will add to the glut of real estate on the market looking for buyers. If interest rates rise, so will mortgage repayments, and the problem is likely to get worse.
7. When the money available for mortgages is falling, it will depress the number of buyers. This will lead to falling house prices.
8. If realtors say there’s a shortage of first-time buyers it’s usually because houses are too expensive and everyone is waiting for prices to drop.
9. When too many people are speculating in property, prices are driven up to unrealistic levels.
10. Speculators have also used “no money down” and interest-only loans to buy property and are having problems generating cash flow from rents to meet mortgage payments. This will force them to sell at a loss and add to the glut of unsold houses on the market.
11. If talk of a real estate bust spooks speculators, they may try to dump their property investments. If they all try to get out at the same time it would contribute to the glut in the housing market, further depressing prices.
12. Should builders and developers overbuild and get stuck with a lot of empty house on their hands they will be forced to drop prices because they need to get rid of inventory.

Tips & Warnings

• If you're buying a house don’t buy one that costs more than 3 times your gross household income, and do not pay more than 200 times the rent you would get on the property.
• If you're not a real estate expert, don’t start speculating in this climate.
• If you own investments that are tied to the real estate market -- like Home Depot (NYSE: HD), Lowe's (NYSE: LOW) or mortgage companies – think about how a downturn will affect their businesses.
• Don't panic. If you are not thinking of moving, or selling your house in the near future, just ride the crash out.