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?
A real estate bubble happens when the real estate market is inflated by artificial factors — such as the influx of bad loans that caused the 2008 crash — instead of fundamentals. High demand for houses and a low supply drive up home prices naturally. A bubble caused by easy access to mortgages is not sustainable in the long run, and eventually, it 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. And while the current real estate market may look like a bubble at first blush, it isn’t one. Here are the reasons why.
Mortgage lending standards are much tighter than in 2008
You could certainly say that mortgage lenders took what they learned from the 2008 crash to heart, as they’re not writing loans with wild abandon anymore. 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, examining your income, employment, and bank account, along with other qualifying factors. In fact, the average homebuyer today has a credit score of at least 720 and a debt-to-income ratio higher than 36%.
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
Speaking of mortgages, only the best mortgage lenders issued solid loans to qualified homebuyers before the 2008 crash, while others gave out adjustable-rate mortgages like crazy.
An adjustable-rate mortgage is exactly what it sounds like: you start with one interest rate and it may increase during the life of the loan. That 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 0.1% of mortgages being approved today are adjustable — versus the whopping 60% before the 2008 crash. That makes homebuyers breathe a sigh of relief.
New households are being formed
Another sign we may not be in a real estate bubble is that there really are a lot of qualified homebuyers seeking to put down roots — 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. This will likely reach its zenith from 2022 to 2024, so we’re in the thick of it right now. That’s 72 million people seeking to become homeowners.
Another factor that may increase the number of homebuyers is the rise in work-from-home post-COVID-19 jobs. Indeed the demand is real, and not artificial as it would be in a bubble.
Lack of homes for sale keeps demand and prices high
The abundance of people seeking to purchase residences isn’t the only factor driving demand. The inventory of homes available in the U.S. market is low for other reasons.
According to the National Association of Realtors (NAR), over the last two decades, the U.S. underbuilt to the tune of 5.5 million homes. That’s even factoring in the overbuilding that was rampant before the 2008 financial crisis.
Additionally, the ability to build new houses has been impacted by both post COVID-19 supply-chain issues and the ongoing labor shortage. Again, this very real demand is a telltale sign that the housing market is strong.
The job market is strong
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 afford a house can do so. Unemployment is also low, which makes sense given how many places are hiring. And unlike the 2008 crash, people can actually afford the houses they purchase.
Foreclosure rates are low
The major cause of the 2008 market crash was the rash of people defaulting on their mortgage payments, causing a massive wave of foreclosures — six million total. 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
While this might not be the most welcome news for those seeking to buy a home, the fact that interest rates are slowly rising is one last sign we’re not in a real estate bubble.
In a move to combat what seems like ever-increasing inflation — in almost every facet of economic life, from the grocery store to the gas station — the Federal Reserve is poised to raise the target interest rate repeatedly over the coming months.
And since mortgage lenders are already pretty strict about whom they will lend to, this means that folks who aren’t in a realistic position to buy a home won’t be able to. Thus the real estate market may stay strong instead of collapsing.
Perhaps the biggest question homebuyers have is whether or not homes will remain affordable. The good news is that it’s likely that home prices will stop increasing as much as they have in the past few years. Prices may be within reach for more buyers in 2022 than they were in 2021.
With some assurance that the housing market isn’t in a bubble, homebuyers may also feel confident that their home investment will be solid.