There are several indicators to look for when trying to determine if the real estate market in a particular sector is just a “bubble” waiting to burst. While the lingo in a particular sector of the market might be called something different, it all comes down to the basics of supply and demand.
For example, in the apartment market, when there is a glut of apartments on the market and vacancy rates are high for the mid-range and “lux” style apartments, this is a pretty good indicator that apartments are over-built in the area, and the sooner things pull back in terms of new construction builds, the better for those who are current investors.
Single-family residential products can be trickier, as some might think that days on market is the indicator for the bubble. But, actually, that is more of an indicator of market pricing of a particular property. The broader market bubble indicator for single-family residential is the “months of supply”. In general, anything short of 3 months supply indicates a very robust market. Anything greater than 9 months supply generally indicates a weak market.
Industrial bubbles can be created overnight when a user-industry has a major change that requires how their business is conducted to change. For example, major changes in the online procurement of goods from major website distribution channels has caused industrial development to explode in the last decade. This new demand for box space has transformed vast empty fields into cross-docked warehouses built on speculation and with specifications that are fit for a king’s demands. Some of the finer industrial park developers have made this an art while others have cranked out such developments in bread-and-butter mainstay fashion.
Commercial office building products are stratified among a class rating system (Class A, Class B, and Class C) and vacancy rates are calculated among these different classes within various size and geographic boundaries. When the Class A space is going for close to the Class B or Class C asking rates, this is a good indicator that the commercial office market is softening. The asking prices are driven, of course, by the vacancy rates within each class. If the asking price of a Class C property is approaching that of a Class A property with location and size being equal, the Class C property is either mis-classified, a good deal, or the bubble is reaching its burst-point.
These are just a few of the common indicators of the state of the bubble at any given point in a real estate cycle. Other factors of course should be observed simultaneously with these, such as, GDP, unemployment in a given area, interest rates, and other economic indicators to better gauge reality.