Are We In A Housing Bubble?

September 13, 2021 derekevansteam

Many folks think that home price gains in 2021 are all too similar to the price run-up leading to the 2008 housing market crash. But, while the current home prices may look bubbly, let’s put it into context with today’s homebuyer demographic and disposable income and you’ll see that today’s housing climate is very different than it was 13 years ago.

Disposable Income

The mid-2000’s bubble was built on credit. Through subprime and stated loans, people were able to buy homes with little proof of savings, income, credit, or stable employment. Many borrowers took on mortgage payments that were disproportionate to the amount of their disposable income. In response to the 2008 housing market crash, the Dodd-Frank Act tightened lending standards requiring that all loans be documented and borrowers be better qualified on criteria like debt-to-income and credit scores.

On top of that, mortgage debt service payments as a percent of disposable personal income is at its lowest point since at least 1980. In the fourth quarter of 2007, mortgage debt service payments made up over 7% of disposable personal income. That figure was less than 3.5% in the first quarter of 2021.


Homebuyer Demographics

In the mid-2000’s, price gains were fueled in part by speculative demand. People were using lax lending standards and low interest rates to buy second and third homes as investment properties. The market was facing a shortage of Gen X’ers in the prime home buying age and an oversupply of inventory. Today, the housing market has the opposite problem. Demand in the 2020’s is built on a wave of millennials aging into the peak home buying age range of 30-35. And the number of people in this age bracket is expected to grow for at least the next eight years, fueling housing demand regardless of where prices and interest rates go.

At a glance, the 2020’s home price gains may look eerily similar to those of the mid-2000’s. But today’s market doesn’t seem to be a bubble waiting to burst. What we’re likely feeling instead is a shortage of housing supply driven by high demand from largest cohort of buyers entering peak buying years and fueled by low interest rates, flexibility to work from home and increased saving. (And perhaps a little FOMO).