This article will be tackling the multifaceted question of whether or not industry experts think we’re heading for a housing bubble in 2022-2023.
When the housing market has a year that’s as hot as this year has been with as limited of a supply, it would come as no shock that it could brew fears of a housing bubble arising. It’s because of those fears that this article will be going over the current data from both sides of the discussion and what things can be done to mitigate risk in the event of a housing bubble.
Before delving into each side of the discussion of a housing bubble, it is important to understand what a housing bubble is. A housing bubble is an increase in home prices fueled by demand, speculation, and exuberant spending to the point of collapse. A housing bubble usually arises when a demand increases while a supply stays limited for an extended time. Money continues to be poured in by speculators which furthers the demand and then at some point demand lowers at the same time that supply increases, causing a major drop in prices.
One thing to consider within the market is the rise in median home prices which has risen over 30 percent in the last two years and almost 20 percent of that rise occurring within the last 12 months. This is unprecedented growth in median home prices considering that the normal growth in prices since 1986 has been about 5 percent per year. This fact paired with the fact that even though the labor market has been hot this year, incomes in the private sector rising almost five percent within this year, this growth isn’t nearly enough to keep up with the increase in home prices. The disconnect between these two statistics is one of the factors that has certain experts in the industry on edge. However, these facts alone do not indicate whether a housing bubble is likely as there are other variables to consider and how those variables have affected the statistics.
To begin, many industry experts have stressed that there may be indicators of a potential market situation that resembles the housing market crash of the mid to late 2000s but the conditions of today’s market are very different and the causes for these indicators vary greatly. Some of the factors being looked over are:
Homebuyers have a lot more purchasing power
Issues caused by the pandemic
Changing dynamics of the housing market
Lending Standards
Supply of homes
Home Equity differences
One major difference between today and the market crash of 2008 is the purchasing power available to homebuyers. There are a few factors to look at when determining the difference in purchasing power:
Debt-to-income ratio: The debt-to-income ratio is the amount of total debt a person owes each month compared to their income. This ratio is at a four-decade low (which is a good thing!)
Nominal House Income: Income that is not adjusted for changes in purchasing power or the amount of goods or services one can afford, owing to inflation. This nominal income has increased by 40 percent since 2006.
Lending Standards: The lending standards have become much more structured and restrictive after the market crash in 2008 and even a further tightening of lending standards has been enacted in the last few months. Irresponsible lending was one of the major factors that helped cause the market crash in 2008.
Home Equity: This is the value of a homeowner’s interest in their property. This equity–or–value will change over time as the homeowner pays on their mortgage. (Liens on a property can affect the equity of a home).
With all of these factors brought into consideration, it is fairly clear that the purchasing power of the average home buyer has increased. This purchasing power has nearly doubled since 2006 and this new purchasing power has helped create a new “normal” within real estate markets. In conjunction with the increase in purchasing power, the pandemic also caused a shift in today’s market and industry experts say that some of the signs people are worrying about are the market starting to return to the normalcy seen before the pandemic.
Another factor that the pandemic affected is the number of homes that are available in comparison to the number of buyers vying for a home. The number of buyers far outweighs the number of homes currently manufactured. The pandemic helped aggravate the shortage of homes and is cited by industry experts as one of the major reasons for the current dearth of homes. Zillow researchers were cited saying that the expectation or fear of another housing crisis could help contribute to the continuing rise in home prices. They rationalize this position by explaining that one of the biggest factors of the continuing rise in home prices is the scarcity of homes and that scarcity is causing bidding wars to happen on the available properties.
Home values and purchasing power at the heights that they are at in conjunction with the stricter lending practices are all factors that industry experts cite as the major difference in market conditions when compared to the 2008 housing market. Furthermore, it’s these differences that make certain industry experts confident that we are not and probably won’t see a housing bubble in a while.
A housing bubble can cause a lot of turbulence within a market and the economy, so reputable sources do not often claim this market condition readily. However, the current conditions of the market have caused reputable sources such as the “Federal Reserve Bank of Dallas” to release a research paper titled “Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble” and this paper goes over some of the conditions that have some experts worried about a housing bubble. Some of these factors include:
House prices tearing away from market fundamentals
Exuberant spending due to the rising home prices
Low-Interest rates
Luckily, the research does speak to the fact that we are not currently in a housing bubble but house prices are rising at an alarming rate but have not exceeded to the point of exuberant spending. The low interest rates were a contributing factor during the 2008 market crash, however, the market conditions found today are much different as home equity is much higher and lending practices have become much more restrictive (partly due to the crash of the mid-2000s).
Ultimately, the housing market is a very complex and multifaceted industry that takes a nuanced approach to look at it properly. The best thing that can be done is to look at your local market drivers and figure out what is causing home price increases, do your research either independently or by reaching out to an expert, and most of all–make informed decisions that are backed with logic and research rather than fear.
