Here’s how today’s market is different from the Great Recession housing bubble
Home prices are higher than they’ve ever been, and they show no signs of stopping.
The median U.S. home listing price was $449,000 in July 2022, about the same as it was in June, according to data from Realtor.com. That’s an increase of 16.6% year-over-year.
Homebuyers might see similarities between what’s happening today and the 2006 housing market where home prices became increasingly unaffordable until the bubble burst, helping trigger the worldwide financial crisis we came to call the Great Recession.
Stressed-out buyers might be thinking these high prices are a bubble just waiting to pop again. In fact, 77% of homebuyers believe there’s a bubble where they live, according to a recent Redfin survey.
Today’s market differs significantly from what happened 15 years ago, when high home prices were instead driven by loose lending practices and rampant investor speculation in the market.
Waiting for the market to crash might not yield the results buyers hope for, experts say. “There’s not really any room for there to be a bubble right now. It’s not like people have borrowed too much and it’s not like homes are overvalued,” says Daryl Fairweather, chief economist at Redfin.
There are a lot of reasons why it seems like we’re in a bubble, but at its heart, the issue is simple: supply and demand are driving up prices. “There aren’t enough homes for everybody who wants one,” says Fairweather.
Here’s what’s different about today’s market, what’s behind the record-high prices, and what buyers can do to navigate the process.
Things have changed since 2006
The current market and that of the mid-2000s share some similarities. Namely, housing prices were up and often unaffordable for buyers. The causes are different, experts say.
The previous bubble came after a period in which lenders were more lax about writing loans and more people were in the housing market as an investment rather than to buy a home to live in. “Mortgage underwriting was considerably looser back in 2006,” says Robert Dietz, chief economist at the National Association of Home Builders. “It was easier to get a mortgage to speculate in the housing market. That’s not the case today.”
Different home loans, such as adjustable-rate mortgages with big “balloon payments” due at the end of the term, meant people got into homes thinking they could afford the payments, finding out later their payments grew dramatically to unaffordable levels, Fairweather says. “There was a lot of financial engineering, there was a lot of predatory lending, there was a lot of bad borrowing on people not having a lot of equity, not having as much of a cushion, that led to the housing bubble,” she said.
Those types of loans are far less common today, and there’s more oversight of home lending in the wake of the crisis of the late 2000s, experts say. Today, most borrowers get 30-year fixed-rate mortgages, which don’t come with the risk of payments suddenly rising dramatically as rates increase, Fairweather says. “If you own a home, you’re still paying what you paid when you got your fixed-rate mortgage.”
There aren’t enough homes
There are two major ways homes enter the market: Somebody builds a new one or somebody sells an old one. Both of those pipelines are a bit defective recently. “Today it’s really just about lack of supply,” Dietz says.
Builders are struggling to catch up
The limited supply of new homes is due to factors both old and new, Dietz says. For the last decade, builders haven’t put up houses at the rate they needed to handle today’s demand, which he says has probably created a deficit of at least a million homes. At the same time, costs have gone up since the pandemic. Deitz blames the constraints in the market to what he calls the “five Ls”:
|Labor||Builders are having a hard time finding skilled workers, particularly in hot markets such as Texas.|
|Lots||There’s about a year’s supply of lots available when the market needs two to three years.|
|Lending||Homebuilders, especially smaller companies, face a tighter market for borrowing the money needed to build.|
|Lumber and building materials||Lumber prices were about $350 per thousand board feet in January 2020. They’re about $1,300 now, Dietz says. On top of lumber, there are shortages and delays in things like garage doors and microwaves.|
|Laws and regulations||Issues like zoning can limit how many homes can be built in a certain amount of space.|
The tight housing market means new construction is even more important for buyers trying to get a home. While new homes typically account for less than one in ten sales, it’s now about one in three, Deitz says. Supply chain issues also mean new homes take longer to build – from a typical time of about six and a half months to now about eight months.
“When you add all those together, it’s just gotten a lot harder to build homes,” he says.
Fewer people are selling
Existing homes make up most of the market, but the supply of those is also down. Some of that has to do with the affordability issues affecting buyers. A survey by Discover Home Loans found 79% of homeowners would rather renovate their homes than move.
High home prices might seem to encourage people to sell their homes and cash in, but most of those people would have to buy another home and pay those high costs. “If they try to buy again, they’ll be facing a really tough market as a buyer,” Fairweather says. “The only people who are really in a good position to sell and buy again are people who are downsizing or moving to a more affordable area.”
There are more buyers
The supply constraints mean there aren’t as many homes for people to compete for, but those open houses are also busier than ever. More people are deciding homeownership is right for them.
“There’s a lot of demand for homes right now,” Fairweather says. “A lot of people are looking.”
Partially, this is due to millennials entering their prime homebuying years, experts said. Many members of this big generation are in their 30s, often married with children. “We’re seeing a big push from millennials to buy a home,” Fairweather says. “That’s been years in the making.”
The pandemic has also made remote and hybrid work a possibility for many – meaning you don’t have to live close to an office and you might need more space than you can find in an apartment. Remote work means owning a home is a possibility for more people, Fairweather says, adding to demand.
When will the housing market calm down?
It will likely take a while before the inventory of available homes matches up with demand. Experts surveyed by Zillow predicted it’ll be two years before monthly inventory returns to pre-pandemic norms. They estimated it could be 2024 or 2025 before the portion of first-time buyers again reaches the 45% seen in 2019.
Rising mortgage rates – they’ve gone from near 3.3% at the start of the year to near 6% in six months – will likely take some buyers out of the market and slow the rise of home prices. “It should weaken demand, but there’s so much demand it’s hard to say how much it’ll really impact things like sales and home prices,” Fairweather says.
Higher mortgage rates might not directly lead to lower prices – supply and demand will still be the big factors – but it could make life a little bit easier for buyers, Dietz says. “The bidding wars are going to cool off.”
Widen your search if you can. If you work remotely or are only in an office a few days a week, don’t worry about being as close to work as you might if you had to commute every day.
The factors driving up prices aren’t likely to subside anytime soon, Dietz says. “I don’t think buyers should be betting on any really significant price declines. If anything, as interest rates move higher, the cost of buying a home is going to go up.
What can homebuyers do in this market?
As Redfin’s survey found, many buyers think the market is in a bubble right now, and they might be tempted to wait for it to burst – some economic cataclysm suddenly making a house affordable. Experts caution against hoping for that.
“I think you want to be strategic, and you want to be patient,” Dietz says. “Patient is different from waiting for a crash.”
Buyers will have to look harder and widen their search, he says. There are ways to get creative: If your work is hybrid and you only have to go to an office two or three times a week, reconsider your commute and think about it on a weekly basis rather than as a daily burden. You could look farther away from work where housing is sometimes cheaper.
You can also consider other options, Dietz says. One is to look at new construction if you haven’t already. Keep in mind there’s a longer lag time than usual, but it could be easier than competing for scarce existing homes with the mob of other potential buyers (and investors and flippers with cash offers). There are also options other than the usual single-family home, such as townhouses.
Any slowdown caused by higher mortgage rates will make the market a little easier for buyers who are patient, Fairweather says. “By end of summer there should be more homes on the market as not as many buyers will be taking them off the market,” she says.
The market could be in for a shift this year as it copes with higher mortgage rates, Fairweather says. You may want to slow down and consider your options. “I don’t think it’s wise to try to rush the market now because right now the market is adjusting,” she says.