- Speculations about a US housing bubble are gaining momentum.
- But two key signs suggest the real estate market is not in a bubble.
- Both have to do with the fact that more Americans are relatively well positioned financially.
Home prices have hit record highs – and with affordability falling, it’s no surprise that homebuyers and pundits are debating the possibility of another property crash.
“The housing market is definitely showing signs of foam,” Ali Wolf, the chief economist at Zonda, a homebuilding prop-tech company, previously told Insider. “Because of this, a lot of people started drawing comparisons to the real estate boom of the mid-2000s.”
“Foam,” “crash,” and a bursting “bubble” are all real estate slang for a worst-case scenario when the currently hot housing market cooled so much that homebuyers couldn’t sell their homes for more than they paid for.
Earlier this month, the Federal Reserve Bank of Dallas released a report suggesting US home prices are once again out of whack, which buyers can afford if they buy out of fear of missing out rather than from the strength of their long-term financial health.
“Our evidence points to abnormal behavior in the US housing market for the first time since the early 2000s boom,” the Fed researchers wrote. This “abnormal behavior” has people worrying about a bubble, which is defined when the high value of an asset like a home is not supported by underlying factors like Americans’ long-term ability to afford their homes.
Despite signs of volatility, experts told Insider that there are two main reasons the real estate market isn’t in a bubble yet.
Home buyers have a lot of purchasing power
The current housing cycle may draw comparisons to the housing market in the mid-2000s — but that doesn’t mean today’s homebuyers are doomed to repeat history.
Odeta Kushi, deputy chief economist at title insurance company First American, believes a housing crash similar to 2008 is unlikely.
“The housing market is in a much stronger position compared to a decade ago,” Kushi told Insider. “Along with tighter lending standards, household debt-to-income ratios are at a four-decade low and household equity near a three-decade high.”
The debt-to-income ratio is used as a common measure of financial health, comparing the total amount of debt a person owes each month to their income. The less debt a potential buyer has, the more money they can invest in a home purchase.
Data from First American shows that consumer home buying power not only remains near record levels, but has more than doubled since 2006. Census data also shows that nominal median household income has risen about 40% since that period, which is why Mark Fleming, First American’s chief economist, says today’s shoppers are faring much better off than those of the mid-2000s.
“Many may think rates below 3 percent and purchasing power for homes over $450,000 are normal based on timeliness, but historically that’s anything but normal,” Fleming told Insider. “The last two years have been the exception, not the rule, and the housing market is adjusting to a not-so-new normal.”
The real estate market is now returning to its usual dynamic, according to Fleming. While buyers are worried about the changed conditions, they are actually just returning to known pre-pandemic levels.
Real estate values remain at historic highs
The housing market’s new normal has come with rapidly rising mortgage rates and a shortage of homes for sale — but that doesn’t mean a bubble is brewing.
“Conditions are different from 2008 and a housing downturn seems unlikely anytime soon,” NerdWallet analyst Holden Lewis told Insider. “Builders have not overbuilt and lenders have strict lending standards. When you combine these trends, you have a housing market that is unlikely to collapse anytime soon.”
The lack of housing in the nation has resulted in a drastic increase in home prices across the country. Although this has further reduced housing affordability, it has also increased the value of the assets Americans own in their home. Data now shows that the average mortgagee currently has about $185,000 in tapped home equity — the amount of money a homeowner can access while retaining at least 20% equity in their homes.
“When the housing market crashed in 2008 and 2009, it was because a lot of people owed more than their homes were worth,” Lewis previously told Insider. “So when they couldn’t afford to make their payments, they didn’t have the opportunity to sell their homes, pay off their mortgages and start over. Instead, they ended up in foreclosure.”
With home prices and demand at historic highs, today’s homeowners are more likely to sell their homes if they become too unaffordable. So while the real estate market may be out of whack, homebuyers are in a far better living environment. This means that a housing bubble and crash like the mid-2000s are unlikely — at least for the foreseeable future.