A Hot Housing Market Doesn’t Mean It’s a Bubble

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There’s no doubt that today’s housing market is competitive. People are buying up homes quickly, and sellers are raising prices. This put a lot of pressure on buyers in 2021 in particular, as many would-be homeowners experienced bidding wars and rejected offers.

The last time many of us remember a hot housing market starting to cool was back in 2007 — and we all know what happened then. However, all this activity doesn’t mean the housing market is in a bubble. Here are a few reasons why real estate professionals can rest easy about current conditions being quite different from those that led to the Great Recession.

The Housing Crash of 2008

To understand the current housing market, it’s essential to look at the past. One of the causes of the 2008 crash was banks lending money to home buyers who couldn’t afford to repay.

Another challenge was the introduction of non-traditional mortgages, such as no income, no job, and no assets (NINJA) mortgages. Subprime lenders took advantage of a rush of business, and on the consumer side, these loans were popular because buyers could quickly obtain them without providing comprehensive documentation.

But it wasn’t just about an inability to repay, according to Wharton real estate researchers. New private borrowers increased access to credit that encouraged all kinds of borrowers and risk-takers to feed the fire. People were seeing low-interest rates for home equity lines of credit and mortgages for investment opportunities, and this added a lot more risk to an unstable system.

Eventually, the collapse of these subprime loans and packaged mortgage securities reverberated throughout the entire economy.

This is just part of the picture, of course. The Great Recession runs much deeper than this, as risk-taking hedge funds, credit swap schemes and other examples of poorly regulated financial activity also played a role. However, we hope this brief explanation provides a good starting point for understanding the differences between the 2006 – 2008 housing market and today’s conditions.

Why Today’s Market Trends Are Different

Real estate professionals and lenders have learned from past mistakes and many economists believe the housing market isn’t going to collapse. Here are the main differences to consider:

#1: We’re Having a Housing Supply Problem

One source of anxiety for buyers right now is rising home prices — which is largely a supply-side problem. Much of the price squeeze now stems from inadequate inventory. This is a departure from the predatory lending and high demand for credit that characterized the early 2000s boom.

Between 2000 and 2009, building companies constructed approximately 14.6 million homes. From 2010 to 2019, construction cratered and we built about 6.9 million homes. This hasn’t kept up with the rate of household formation across the country, as reports show 12.3 million new households formed over that same period of time.

This shortage leads to price appreciation, especially in housing markets near popular cities and job centers. Costs may continue to rise due to homeowners’ needs and newer generations entering the market.

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#2: Financial Regulations Make Loans Less Risky

Another factor that reduces the risk of a housing bubble is that it’s harder to get mortgages today. In response to the economic crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The act established new regulatory bodies to prevent predatory lending and oversee risk in financial institutions’ operations.

As a result of new financial regulations and more cautious behavior, borrowing is safer. Today’s lenders have increased their standards, requiring better documentation and higher credit score thresholds — the minimum for most conventional loans is between 600 and 620. Having these stricter requirements reduce the risk of buyers winding up in foreclosures.

Plus, there are fewer adjustable-rate mortgages. Adjustable-rate mortgages are risky if borrowers can’t afford them once interest rates rise. These mortgages also have new regulations. Now, these are fully underwritten and sometimes initially operate under a fixed rate.

#3: Homeowners Have Better Financial Stability Than Before

Homeowners are in a better financial place compared to many borrowers in 2006 and 2007, which provides a cushion when it comes to changing market conditions.

For example, the US mortgage debt is 43% of current home values. Negative equity — where the borrower owes more on the loan than the home is worth — has also fallen. With today’s buyers more financially secure, there’s less risk for lending money.

Another trend in buyers’ financial security is lower mortgage delinquencies. This means people aren’t as behind on their payments as they were in the height of the 2008 market crash. Pandemic-related mortgage forbearance programs also helped millions of borrowers recover from the economic crisis. These services allowed lenders to pause or reduce their property costs for a limited time.

These statistics don’t mean people aren’t suffering from poor economic conditions, of course. It just shows that stricter financial regulations have homeowners in a less vulnerable place than they were when subject to predatory lending practices.
Hot Housing Markets Aren’t the Same as Housing Bubbles
Home prices are increasing, and bidding wars are more common. Some people are concerned about a potential housing market crash like the one in 2008. Today, there is lower inventory and stricter lending regulations, so economists don’t believe there is currently a housing bubble.

Remember — this doesn’t mean that a market downturn or correction isn’t in the cards. But the Great Recession was the collapse of a house of cards built on fundamentally unstable grounds. There are still many lessons financial institutions and real estate professionals can learn from the 2000s, of course, but today’s conditions are driven by different factors.

About the Author: Evelyn Long is the editor-in-chief of Renovated, an online resource for the real estate market. Her freelance writing has been published by the National Association of REALTORS®, Insights for Professionals and other prominent industry magazines.


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