Aug 08, 2022 - 10m read
Is Atlanta in a Real Estate Bubble?
With the rapid increase in home values alongside the rise of interest rates, you may be wondering if the market is in a real estate or housing bubble. A real estate bubble is a type of market condition that occurs when prices and home values increase at a rate that’s higher than what the broader market is able to sustain.
Anthony Reinoehl
Co-Founder
With the rapid increase in home values alongside the rise of interest rates, you may be wondering if the market is in a real estate or housing bubble. A real estate bubble is a type of market condition that occurs when prices and home values increase at a rate that’s higher than what the broader market is able to sustain.
When average home prices are more than 5-6x higher than the median household income for the area, it becomes increasingly difficult for buyers to make a purchase, which can lead to much more homes on the market than potential buyers.
There are several causes of a real estate bubble, the primary of which involves artificially inflated prices. While there are some additional causes that can lead to a real estate bubble, current market conditions indicate that inflated prices are the main reason why people believe a real estate bubble may occur in the near future.
The issue with a real estate bubble is that it can be highly damaging to the real estate market and participants within the market once the bubble bursts. In this scenario, property values tend to plummet, which results in cascading effects that hurt everyone in the industry. These effects include everything from homeowners being unable to sell their properties at a reasonable price to tighter lending terms for businesses and individual borrowers alike.
When looking specifically at Atlanta, this city is known to have some of the highest premiums in the country when taking home values into account. While this indicates that the city is in a housing bubble, it’s difficult to predict when the bubble might burst. When a bubble expands, buyer demand tends to increase as buyers make more emotion-based decisions, which means that now may be the perfect time to sell your Atlanta home. The following goes into more detail about housing bubbles and if Atlanta is currently in one.
What is a Real Estate Bubble?
A real estate bubble occurs when prices rise above what economists believe is sustainable or reasonable for the broader market. To better understand what this market condition entails, consider that a housing bubble starts to occur when the median home price is around five times higher than the average household income.
A bubble forming doesn’t mean that the real estate market is in immediate danger of being significantly damaged. However, the market does tend to change in this scenario. What these changes look like largely depends on the cause for the real estate bubble. For instance, a bubble may form if the demand for housing is higher than the supply that’s currently available on the market. This scenario occurs when housing prices have increased rapidly in a relatively short amount of time.
When this situation takes place, buyers may feel that they need to pay too much in order to enter the market. At the same time, sellers typically believe that they are able to list the home at a high price because of the relative increase in buyer demand. Over time, the bubble may expand too much, which could lead to the bubble bursting and home values plummeting.
It can be difficult to differentiate between a hot real estate market and a housing bubble. When a real estate market is strong, the market is typically bolstered by local conditions. A housing bubble is more serious and typically leads to a higher number of foreclosures as well as substantially worse home values.
A real estate bubble is always going to be temporary. Keep in mind, however, that the bubble can last for several years. Regardless of the cause of the housing bubble, you’ll typically notice that there’s more demand than there is supply. Unlike some real estate market conditions, housing bubbles don’t only result in a real estate crash. Instead, it’s common for the economy to worsen significantly and for all classes of people to be negatively affected. People tend to lose some or all of their savings when a housing bubble bursts.
What Causes a Real Estate Bubble?
As mentioned earlier, there are several reasons why a real estate bubble can occur. The main cause of a housing bubble involves artificially inflated prices. It’s possible for inflated prices to not accurately reflect the true value of a home if demand has rapidly increased but supply is unable to meet the demand. A few additional causes of a housing bubbles include loose credit standards, relatively low mortgage rates, and high amounts of investor speculation.
When interest rates are low, there are invariably more buyers in the market, which leads to homes being purchased quicker. Eventually, demand will outstrip supply. While it’s possible to adjust supply to account for the increased demand, doing so takes time. Keep in mind that this scenario can worsen as a result of professional house-flippers and real estate investment firms searching for the right purchases as well.
What Happens When the Bubble Bursts?
It’s possible for a housing bubble to burst for several reasons. Once a market gets into a housing bubble, there’s a good chance that it will eventually burst instead of naturally easing. The main cause of a burst bubble involves a quick and rapid rise of interest rates. Even if buyer demand is high, a sudden increase in interest rates can create problems with potential buyers being approved for a loan.
When a bubble pops, it’s common for property values to drop precipitously. In this situation, banks will oftentimes have issues with loans since home values no longer match the price that they were bought for. In response, it’s common for banks and other financial institutions to make their lending standards stricter, which leads to a drop in credit and worse economic activity.
When values fall by a considerable amount, homeowners can find themselves in a situation where their property is effectively “underwater”, which means that the total value of the home is lower than the initial loan amount. The amount that remains on your mortgage may be higher than the current property value. If this issue occurs, any equity you’ve built up in the home could dissipate entirely.
The Financial Crisis of 2007-08
The most significant example of a housing bubble involves the financial crisis that spanned from 2007-2008. While not every housing bubble will be as damaging as this one, it paints a picture of what can take place during a bubble. The real estate market is known to be a leading driver of the economy. When a bubble bursts, it’s possible for a recession to occur. In the worst case scenario, the broader economy could crash altogether.
The financial crisis that started in 2007 was partially the result of a real estate bubble bursting. This bubble began several years earlier and was at its apex in early 2006, which is when housing prices were at their highest. Home values would eventually begin to decline in the latter months of 2007 and into 2007 once the Federal Reserve started to increase interest rates. On December 30, 2008, home values dropped by the largest amount in history.
Because of the ongoing economic crisis, many homeowners were unable to repay their loans, which resulted in mortgages defaulting and foreclosures taking place. This financial crisis is widely known as the Great Recession. Keep in mind that the housing bubble in this period of time was related somewhat to another bubble in the technology sector. The dotcom bubble that took place in the final years of the 20th century caused tech company share prices to rise to unsustainable levels in a brief period of time.
Even newer startups that had yet to garner success on the market were receiving high market capitalizations. Nasdaq would reach its highest point in 2000, after which the technology bubble burst. When this market crash took place, many companies filed for bankruptcy. The ones that survived still experienced sharp drops in stock pricing.
Once investors moved away from the stock market following the bursting of the dotcom bubble, a large percentage of investors moved their money over to real estate. These investors benefited from the Federal Reserve dropping interest rates to mitigate a short recession as well as economic concerns that were raised following September 11, 2001.
From 2001-2007, homeownership grew at extremely high levels. At the same time, lending requirements were loose. Estimates state that nearly 20% of mortgages that were provided in 2005-2006 went to people who would be unable to qualify under today’s lending standards. Once the bubble burst and the economy worsened, these homeowners didn’t have the money they required to make their monthly mortgage payments.
Is Atlanta in a Real Estate Bubble?
When looking at the Atlanta housing market, it currently has the fifth highest premium in the country, which means that buyers are tasked with overpaying when purchasing a home. It’s estimated that buyers must pay a 56% premium to purchase an Atlanta home, which means that the final sale price is 56% higher than the home is actually worth.
It’s clear that, like most of the country, Atlanta is currently in a housing bubble. The expanding bubble leads to an increase in demand, lower supply, and more emotional buying. These factors work together to create market uncertainty while also continuing to drive prices higher. Since it’s almost impossible to predict when a housing bubble will burst, now might be a good time to sell your Atlanta home.
As long as you purchased this property before 2021, there’s a good chance that you could sell your home at a much higher price than it was initially purchased for. Even if the market doesn’t burst in the near future, it’s possible that home values will start to decrease as buyer demand drops off.
While Atlanta’s real estate market is currently strong, the reduction in housing supply alongside the increase in buyer demand may eventually cause the current housing bubble to burst, which would lead to the value of your home dropping considerably. If you’re interested in selling your Atlanta home, current market conditions mean that you’ll likely receive high offers.
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