A recent survey by Redfin revealed that 77 percent of consumers believe we're in a housing bubble. This feeling is supported by the fact that year-over-year home price appreciation is still in the double digits. However, current high prices are the only similarity to the market of the early 2000s. There are four other factors which are different now than they were fifteen years ago.
First, higher prices do not automatically translate to less affordable houses. “Affordability” looks at the price of the home, the purchaser’s wages, and the available mortgage rate. For a conventional mortgage, buyers should not spend more than 28 percent of their gross income on their mortgage payment. During the last bubble, wages were lower and rates were higher. Therefore, today’s buyer pays a lower percentage of their income towards their mortgage, despite higher prices
Second, mortgage standards are stricter now than they were during the last boom. In the early 2000s, almost 400 billion dollars in loans were made to borrowers with scores below 620. In 2021 that number dropped below 100 billion.
The third factor is the foreclosure rate. Better-qualified borrowers paying a lower percentage of their income mean fewer foreclosures. The high foreclosure rates were a key feature of the previous bubble. While there were over two million foreclosures in 2009, there were only 38,000 in 2021. One reason for this contrast is that today’s homeowners are equity-rich, while homeowners in the 2010s were withdrawing their equity as soon as it built up. These homeowners were left underwater when values began to fall. That led to many borrowers walking away from their loans, which led to a large number of distressed property listings and further lowered the value of homes nearby.
Today, over 40 percent of homes in the US have more than 50 percent equity. This means there will be nowhere near the same foreclosure rate as we saw during the crash.
Finally, we do not have a surplus of homes on the market—we have a shortage. There were too many homes for sale from 2007 to 2010, many of which were distressed listings. This abundance caused prices to fall. Today there are not enough homes for sale, causing values to rise.
Consumers who are worried that another housing crash is imminent should be reassured by these differences.