Many Americans are concerned about a housing bubble. However, where we are now versus where we were in 2008 is not the same. The parallels are obvious but there are major differences. A significant reduction in housing value is almost inevitable at this point, but we have so much built in equity, that even if prices fall 10-20%, most folks will still be in a net positive position to sell, which is very different than 2008. 

We Are Not in a Housing Bubble...YET

In 2008, the housing market collapsed under the weight of subprime mortgages. These were loans given to borrowers with poor credit, often with little to no money down. 

When homeowners started defaulting on these loans, it created a domino effect that led to a sharp decline in home prices. As a result, many people found themselves "underwater" on their mortgages, owing more than their homes were worth.

Fast-forward to today, and the situation is very different. 

Home prices have recovered and are now rising at a sustainable rate. There's no reason to believe that the housing market is heading for another crash. And while it's always important to be aware of potential risks, there's no need to panic about the current state of the housing market.

Supply of Homes

The real estate market is like any other market in that the laws of supply and demand govern it. 

When there is an overabundance of homes on the market, prices will begin to fall in order to entice buyers. 

Similarly, when there is a shortage of homes, prices will rise as buyers compete for a limited number of properties. 

According to most experts, a healthy real estate market has roughly six months' worth of inventory; this gives buyers a decent selection of homes to choose from without putting too much downward pressure on prices. 

In recent years, the housing market has experienced both extremes. 

IMG_2038Source: nar.realtor

During the housing crisis, there was an oversupply of homes on the market, leading to sharp price declines. 

In the years since, there has been a shortage of homes available for sale, leading to continued price appreciation.

Anyone who's been keeping an eye on the housing market, it's no secret that inventory is still low, and home prices are on the rise. 

While several factors are driving this trend, sustaining underbuilding is one of the key reasons. In other words, there simply aren't enough homes being built to meet the growing demand. Coupling that with ongoing buyer demand as millennials age into their peak homebuying years continues to put upward pressure on home prices. 

That limited supply compared to buyer demand is why experts forecast home prices won't fall this time, even in the face of potential economic uncertainty. 

 

Tighter Lending Standards 

Lenders have become much stricter when it comes to issuing loans. This has helped to weed out buyers who are not financially capable of purchasing a home. 

Today, subprime mortgages are practically non-existent. Lenders have tightened their standards, so most borrowers have good credit and can make a down payment. 

Homeowners today have been much more conservative in their borrowing. Mortgage debt levels are still below their peak before the housing crisis, and the equity built up in many homes has not been withdrawn. 

As a result, homeowners today are equity rich, not tapped out. In addition, they have been much more cautious about taking on new debt. 

Due to all these factors, homeowners today are much less likely to default on their mortgage even if they experience financial shock. Consequently, the current housing market is much more stable than it was in the run-up to the last housing bubble.

The Housing Credit Availability Index (MCAI) measures the ease with which borrowers can obtain loans for home purchases. 

The higher the number, the easier borrowers can get loans. 

As the graph below shows, the MCAI was relatively high in the years leading up to the housing crisis. This meant that it was easier for borrowers to get loans, and as a result, many people took out mortgages they couldn't afford. 

IMG_2039Source: mba.org

When the housing market collapsed, these borrowers defaulted on their loans, contributing to the financial crisis. 

Today, the MCAI is much lower, meaning it's harder for borrowers to get loans. This is one of the reasons why we aren't seeing another housing bubble.

In the years leading up to the housing market crash, banks and other lending institutions lowered their standards for who could qualify for a home loan. This created an artificial demand for housing that drove prices upward. 

 

Foreclosures

When the bubble finally burst, it led to mass defaults and foreclosures and a sharp decline in home values. The crisis was devastating for many families, but it also served as a reminder of the importance of responsible lending practices. 

By carefully evaluating borrowers and ensuring they can afford the loans they take out, lenders can help avoid another housing market crash.

The most apparent difference between the housing market crash of 2008 and today is the number of homeowners facing foreclosure. 

Foreclosure activity has decreased since the crash because buyers today are more qualified and less likely to default on their loans. 

The graph below uses data from ATTOM Data Solutions to help tell the story: In 2010, foreclosures peaked at around 3 million and have been steadily declining ever since. 

IMG_2040Source: ATTOM Data Solutions

 

The Data is Clear

The data is clear: we are not on the same path that led to the housing crash a decade ago. Prices are rising at a sustainable rate, supported by strong economic fundamentals. And while we may be in a market correction, the current conditions are nothing like those of the last housing bubble. 

The Glass House Real Estate Team

The Glass House Real Estate Team

We are passionate about empowering home buyers and sellers. Our team brings a wealth of knowledge and experience. We will help you seamlessly navigate the home buying or selling process stress-free.