How to Spot a Regional Real Estate Bubble

About a month ago, I took a long weekend to visit Seattle. It was my first trip to the Pacific Northwest.

I expected to find a vibrant music scene, a world-famous coffee culture and some spectacular hiking trails – and I was not disappointed. What I did not expect to find, however, was a real estate bubble.

As this week’s chart shows, home prices in the Seattle area have grown 13.3% year over year. That’s more than double the national average home price growth rate.

And that chart isn’t the only indication of trouble in Pacific Northwest real estate prices. The signs of a regional bubble are obvious… if you know where to look.

Lots of Windows, Not a Lot of Lights On

To be fair, some of greater Seattle’s growth is organic. The trendy metro area is a major technology hub, home to Amazon (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT), among many other companies.

The downtown Seattle skyline is growing daily as developers race to build new luxury high-rise apartments for Amazon employees. This rapid construction doesn’t necessarily indicate a bubble itself. But if you take a stroll through the area after sundown, you’ll see something that’s concerning.

The towers – even those that were completed years ago – are mostly dark.

When a construction boom coincides with unusually high vacancy rates, that’s a red flag for the real estate market. This combination can indicate that developers are overestimating the demand for housing. It can also be a sign that people are investing in apartments rather than living in them – but more on that in a moment.

According to the Puget Sound Business Journal, Seattle’s apartment vacancy rate is at a seven-year high… and it’s still rising.

Out-of-Control Home Flipping

Another indication of a housing bubble is rampant or low-effort “flipping” – the practice of buying or renting homes as short-term investments rather than as residences.

This is another red flag I personally witnessed while exploring Seattle. Like many tourists these days, I used Airbnb to find a place to stay. I found a small one-bedroom apartment in a brand-new development near Lake Union.

Just as I arrived at the property, my host (who will remain nameless here) sent me a cryptic email, asking me to “be discreet about staying in the apartment via Airbnb.” As soon as I opened the front door, I understood what they meant.

The apartment was completely empty, save for a bed. No other furniture, no decorations, no personal effects of any kind. Given the newness of the building, it seemed likely that no one had ever actually lived in that unit.

I didn’t mind the sparse accommodations, but they carried some worrying implications. It was very obvious that my host had bought or leased this apartment solely to generate passive income via Airbnb. And given the mysterious “please be discreet” comment, it seemed like they were violating some local laws in the process.

This anecdote isn’t the only sign that Seattle’s home-flipping market has become saturated. According to RealtyTrac, approximately 17% of all home sales in greater Seattle are flipped. And the average flipper easily earns six figures in profits.

A Bad Time to Buy in the Pacific Northwest

Between the runaway growth in housing prices, the suspiciously high vacancy rate and the excessive flipping, it seems pretty clear that Seattle is not a good place to buy real estate right now.

What’s more, you now know how to spot an overvalued housing market in your town.

The late 2000s housing crisis may be years behind us… but regional real estate bubbles are still a very real threat to investors – especially those who favor real estate investment trusts (REITs).

— Samuel Taube

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Source: Investment U