What is a Housing Bubble and Are We in One?

Estimated reading time: 3 minutes

Maybe you’ve seen the headlines or heard people discussing how the housing bubble is about to burst. Despite any salacious headlines, our nation’s housing market is in a far better place now than it was during the housing crash of 2008. What makes experts so certain that we won’t make the same mistakes as last time?

What Exactly is a Housing Bubble?

A housing bubble typically includes a run-up in housing prices fueled by demand, speculation, and excessive spending until the collapse. Typically, housing markets are not as prone to bubbles as other financial markets due to the large transaction and costs associated with owning a home.

What Happened in 2008?

During the bubble that led to the crash in 2008, investors had abandoned the crashed stock market to invest in real estate. This, combined with the Federal Reserve cutting interest rates to combat the recession, flooded the market. Many buyers fell victim to predatory lending, lax spending standards, and excess debt in assets. They were placed into mortgages they couldn’t possibly afford. This led to a lot of negative equity situations where the amount a person owed on their home was more than their house was worth. Without any equity in their homes, many buyers were forced to foreclose. The missed payments and mortgage defaults then began to negatively affect the homeowners’ credit.

What Makes This Market Different?

There are banking and lending legislation and regulations that have been set in place to ensure a housing bubble is less likely to occur, including more precise credit score requirements and debt-to-income ratios.

In the graph below, we’ve displayed information gathered from the Federal Reserve regarding the volume of loans in billions with a credit score below 620. The information in red represents the 300 to 400 billion dollars being provided to borrowers leading up to 2008. The large decrease in loan volume for lower credit scores is representation that the legislation and regulations have worked in keeping lending in check to make sure borrowers can repay the mortgages they qualify for. There are also now several loan programs available to make housing affordable for prospective homebuyers that may have lower credit scores.

Unlike the crash of 2008, the current factor driving up home values is our dire inventory shortage. This was also an issue for our national market pre-pandemic. Experts agree that a balanced market has at least six months of inventory. We’re currently at 1.7 months of inventory, a historic low. Not only could construction companies not build houses fast enough, but they also didn’t have the people to build them during the supply chain and employment shortages during the height of the COVID-19 pandemic less than a year ago.

There are also 45 million millennials expected to enter the housing market this year. As they leave home, stop renting with roommates, or move in with romantic and domestic partners, they begin to form new households. All these factors are contributors to the current inventory shortage.

So, Are We Going to Face a Market Crash?

Experts are optimistic that we will have a “corrective soft landing,” rather than a crash. According to the chief economist at Realtor.com, home prices are expected to appreciate nationally by an average 6.6% in 2022, compared to a 19% increase in 2021.

While the market slowdown is concerning for would-be buyers who have waited until after the pandemic, it may help bring housing supply and demand back into alignment and slow price growth. Even as buying slows, the current high listing prices and mortgage rates will help to keep the market healthy during the comedown.

While things may look uncertain, be confident that we have your back through every step of the homebuying journey. Our Loan Originators are here to walk you through the process, give market insights, and answer any questions you may have along the way. When you’re ready to start your home finance journey, contact us today.