Are We in Another “Housing Bubble”?

by | Apr 21, 2022 | Housing Market, Housing Market 2022

The word on the street is that the United States has entered another housing bubble and we are set to repeat the events of 2008 when the housing market crashed. While there are some similarities between the housing market today and the housing market in 2006 prior to the housing market crash, there are also some significant differences that indicate the sky may not be falling right now.

Many experts do not anticipate a housing market crash and while it is impossible for anyone to definitively predict the future, it is important to take all of the facts into account and to understand how you as a homebuyer and homeowner can strategize during these times.

What is a “Housing Bubble”?

According to Bankrate, a “real estate bubble, also referred to as a ‘housing bubble,’ occurs when the price of housing rises at a rapid pace, driven by an increase in demand, limited supply, and emotional buying.”

With this definition, it’s easy to automatically see the parallels in the housing market today with rapidly increasing housing prices and an increasing number of people wanting to enter the housing market all at once.

Similarities Between 2022 Housing Market and 2006 Housing Market

Rapidly Increasing Home Prices

The biggest similarity is the rapidly increasing home prices. The median U.S. home listing price reached $405,000 for the first time ever in March 2022.

In 2006, houses began getting increasingly unaffordable until the bubble finally burst and the entire housing market crashed, leading to the Great Recession in 2008.

Frenzied Housing Market

Another similarity is the frenzied market of homebuyers. The gap between the demand and the supply for homes to purchase has a long way before it closes. And while the frenzy seems to be evening out somewhat, demand is still outpacing supply.

Differences Between 2022 Housing Market and 2006 Housing Market

What are some notable differences between today’s housing market and the housing market precluding the market crash in 2008?

Borrowers Are Not Borrowing Too Much

One of the biggest differences between the current housing market and the housing market in 2006 is that borrowers are not borrowing more than they can afford to borrow, according to Daryl Fairweather, the chief economist at Redfin.

In the early 2000s, lenders and underwriters were very laze fare about approving borrowers for home loans with a minimal level of scrutiny. Virtually anyone could qualify for a home loan and a lot of information concerning borrowers’ finances, work history, etc. was accepted in good faith with no investigation.

Today, borrowers must undergo far more scrutiny when qualifying for a home loan and provide verified documentation for all their information. Underwriters review borrowers’ finances, work history, housing history, debt-to-income ratio, and full credit report to ensure they have the means to pay for a mortgage. No information is accepted in good faith.

Home Loans Are Different

Essentially, a lot of borrowers were set up for failure in the timeframe leading up to the 2008 market crash. Adjustable-rate mortgages and “balloon loans” with large payments due at the end of each term set borrowers up to believe that they could afford their mortgage, only to discover that their payments eventually increased so dramatically that they were completely unaffordable.

Predatory and unethical lending went into crafting the financial crisis in 2008. Today, lenders are held to higher legal standards and can no longer prey on homebuyers who cannot afford the loan they are securing. Federal and state laws have since been enacted to protect borrowers from being victimized by loans with a balloon payment provision.

Most homebuyers today use 30-year-fixed-rate mortgages which do not run the risk of suddenly increasing mortgage payments as rates increase.

Supply and Demand are Driving Up House Prices

There simply are not enough homes to fulfill the housing demand. There aren’t enough homeowners selling homes. The supply of new builds is also currently limited by a lack of labor, a limited amount of available lots, limited lending for homebuilders, the increasing price of lumber and building materials, and zoning laws and regulations that limit the number of homes that can be built within a certain space.

Prior to the housing crash of 2008, new home construction was outpacing the demand. This is not the case today and construction will most likely take several years to catch up with the demand.

Are We in a Bubble?

The question remains. Are we in a bubble? Experts still think not.

Housing market bubbles are exceptionally rare, but they might feel more inevitable because so many of us lived through one. The rapidly increasing housing prices might be giving us all deja vu. But it takes more than high prices to instigate a housing market crash. Investment needs to be pushing the demand far beyond where it should be.

When Will House Prices Go Down?

There is no knowing for sure, but experts do not anticipate house prices significantly dropping within the next 5 years. However, experts also believe that prices should plateau somewhat and stop rising so dramatically within the next few years.

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