8 Reasons Why We’re Not in a Real Estate Bubble Now

SAVING & SPENDING - HOME & AUTO
Although home prices are still on the rise, there are many reasons to think that we're not in a real estate bubble right now.
Updated April 11, 2024
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The 2008 real estate crash was traumatic for everyone as it tanked the entire economy. In a nutshell, this was due to lenders having extremely loose criteria for approving mortgages. This resulted in people acquiring loans they couldn’t afford. Consequently, there was a mass default on mortgages. The Great Recession followed, and we all know how that played out.

Fortunately, the housing market is much different today, which is why we may not be in a real estate bubble. Here’s why.

What is a real estate bubble?

bilanol/Adobe Womans hand with blowing colorful soap bubbles at sunset

A real estate bubble happens when the real estate market is inflated by artificial factors — such as an influx of bad loans, easy access to mortgages, emotional purchasing, and speculative behavior — instead of real supply and demand.

A bubble is difficult to sustain in the long run. Eventually, the bubble bursts, causing a steep decline in home values. This can also have a devastating impact on the economy as a whole, which we now know all too well.

Whether we are in a real estate bubble or not is a matter of debate. Some experts say that the market has seen housing price increases slowdown in the second half of 2022 due to interest rates, but that a sudden and abrupt U.S. housing market crash is unlikely.

On the other hand, some economists point out that while conditions were stable last year, the bank failures in the first quarter of 2023 may be a sign of troubled economic times in the near future, which may put pressure on the housing market.

Mortgage lending standards are much tighter than in 2008

Olivier Le Moal/Adobe Pre-approved stamp on documents

You could certainly say that mortgage lenders took what they learned from the 2008 crash to heart, as they’re not writing loans with ease. In fact, it’s actually tougher now to get pre-approved for a mortgage or to be approved after you’ve found a home.

Lenders go to great lengths to make sure you’re qualified for a mortgage by examining your income, employment, and bank account, along with other qualifying factors. In fact, the median credit score for a mortgage-seeking homebuyer in the third quarter of 2022 was 768. while the median debt-to-income ratio was 35.6%.

That’s a far cry from the housing bubble that caused the Great Recession and one good sign that we are not in a similar situation.

Few adjustable-rate mortgages are being written

Monster Ztudio/Adobe Interest rate financial and mortgage rates concept

Speaking of mortgages, only the best mortgage lenders issued good quality loans to qualified homebuyers before the 2008 crash, while other lenders gave out adjustable-rate mortgages (ARMs) without appropriate measures.

An ARM is exactly what it sounds like. You start with one mortgage rate, and it may change during the lifespan of the loan. This is the opposite of a fixed-rate mortgage that has an unchanging rate. This rate change for ARMs contributed to defaults on mortgage payments back in 2008, as many homeowners could no longer afford the payment at a higher rate.

The good news is that only 10% of mortgages were adjustable in 2022 — versus the whopping 35% before the 2008 crash. Additionally, ARMs today are less risky compared to 2008. Back then, they had a short fixed-rate period that protected homebuyers from rate changes. Now, ARMs have fixed-rate periods that last much longer, up to 10 years.

Plus, when the fixed-rate period ends, certain limits kick in that define how much the interest rate can increase over time. This reduces the likelihood of defaults.

New households are being formed

Studio Romantic/Adobe couple meets with realtor

Another sign we may not be in a real estate bubble is that there are a lot of qualified homebuyers seeking to put down roots through homeownership — specifically, millennials, the largest generational cohort in American history.

This group is significantly larger than boomers or Gen Xers, and they are of the age when people usually buy a home. Millennials account for about 21.9% of the total U.S. population, or about 72 million people.

Another factor that may increase the number of homebuyers is the rise in work-from-home post-COVID-19 jobs, which supports real buyer demand.

Lack of homes for sale keeps demand and prices high

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The abundance of people seeking to purchase residences isn’t the only factor driving housing demand. The inventory of homes available in the U.S. market is low for other reasons.

According to the National Association of Realtors (NAR), U.S. homebuilders underbuilt to the tune of 5.24 million U.S. homes between 2012 and 2020. That’s even factoring in the number of homes added during the period of overbuilding before the 2008 financial crisis. This shortage in the housing inventory is limiting the supply of new homes. 

Additionally, the ability to build new houses has been impacted by the COVID-19 pandemic supply-chain issues and the ongoing labor shortage, further limiting the housing supply.

The job market is strong

Jacob Lund/Adobe municipal office administrator

Speaking of the labor shortage, the current job market is both robust and in favor of workers, and doesn’t appear to be slowing down anytime soon. In the wake of the “Great Resignation,” wages are on the rise in many sectors, from the restaurant business to construction companies to the hospitality industry.

So, people wanting to earn enough money to put a downpayment or afford a house can do so. Unemployment is also low, which makes sense given how many places are hiring. And unlike the 2008 crash, there's a healthy level of affordability for houses right now.

Foreclosure rates are low

mike/Adobe Black Foreclosure Home For Sale Real Estate Sign

The major cause of the 2008 market crash was the rash of people defaulting on their mortgage payments, causing a massive wave of foreclosures — about three million in total for the year. When mortgage-backed securities subsequently tanked in value because of defaults, the housing bubble was exposed for what it really was.

This time around, however, the foreclosure rate is comparatively low. Plus, given the strength of the job market, it may be unlikely that foreclosures are going to increase anytime soon.

Interest rates are slowly rising

Damir Khabirov/Adobe holding utility bill with high rates

While this might not be the most welcome news for those seeking to buy a home, the fact that interest rates have been rising is one last sign that we might not be in a real estate bubble.

In a move to combat inflation, the Federal Reserve raised its target interest rate repeatedly in 2022. This means that borrowing money became more expensive for both consumers and businesses. While higher interest rates tend to slow down the demand for housing, they also reduce speculative behavior due to increased costs and higher risks.

Remember that a bubble often forms when the market sees a lot of irrational expectations and unsustainable factors, such as easy credit, low interest rates, and excessive speculation. That's why rate hikes from the Fed can be seen as a sign that the housing market is not in a bubble, but is rather adjusting to changing economic conditions. 

Related: 4 Strategies the 1% Use to Deal With Inflation

Bottom line

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Perhaps the biggest question homebuyers have is whether or not homes will remain affordable. The good news is that home prices haven't been increasing in the second half of 2022 as much as they did in the past few years. This downturn may mean that home purchases may be within reach for more buyers in 2023 compared to recent years.

With some assurance that the housing market might not be in a bubble, homebuyers may also feel confident that their home investment could be solid.

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Author Details

Cat Lafuente Cat Lafuente is a Florida-based writer and editor with extensive experience in digital and print content spaces. Her own personal finance journey — particularly consolidating debt and paying it off, in turn boosting her credit score and becoming a homeowner — inspired her to join the FinanceBuzz team; she hopes she can help others do the same.

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