Are We In A Bubble? Current Market vs. The Great Recession

If you were paying attention to the housing market in 2008, you’ve probably noticed some concerning similarities between then and now. Just in the last few months, skyrocketing prices had buyers moving quickly to snag homes before prices rose even higher. Then, seemingly without warning, prices began to fall. 

While such drastic changes are bound to strike some fear in buyers who are familiar with the signs of the dreaded housing bubble, real estate experts are in agreement — this is not a bubble, or if it is, it’s a type we haven’t seen thus far.

That’s not to say that the post-pandemic market has been exactly kind to us. High mortgage rates have prevented many buyers from being able to afford homes. Houses sit on the market longer, cutting sales and stopping builds, leaving the inventory to dwindle. Sellers have to make major concessions just to get their homes sold. 

However, without the previous signs like scores of subprime mortgages, overbuilding, and speculation to inflate the market, we are not expecting anything close to the 2008 crash. According to Jeff Ostrowski, a senior mortgage reporter at Bankrate, the recent freeze and falling prices are likely due in large part to the Fed’s attempt to stem inflation by driving up interest rates. In the end, the market is slowing down, but not headed toward a crash anytime soon. 

But what other factors need to be considered when we’re trying to calm our bubble anxiety? Here’s a point-by-point comparison of today’s housing market with the Great Recession. 

Rising Home Prices Were a Craze, Not a Bubble 

Between 2020 and 2022, the median increase in home price per month was almost four times that of the median monthly increase from 2000-2005. But just because the prices were drastically higher is not cause for panic—most economists consider this period more of a frenzy than a bubble forewarning. Ultimately it was the Fed’s high interest rates that tipped buyers over their limit, putting a stop to the price craze. 

While the mid-aughts price jumps were based on the idea that prices would keep rising indefinitely (unlikely), our recent market drop shows that dramatically rising prices were ultimately unsustainable. 

Economists, including Federal Reserve Chair Jerome Powell, are now predicting that the market, which is massively overvalued currently, will steadily fall closer to pre-pandemic prices over the next couple of years, leveling out from the steep and drastic changes of 2020-2022. 

Don’t Be Afraid of Falling Home Sales

Similarly to the Great Recession, we’ve been experiencing a substantial drop in the total number of home sales since early 2022. However, that’s not to say that the market is crashing. 

In 2021, total sales hit 6.21 million, dropping to just over 5 million in 2022, and projected to fall into the 4 million territory in 2023 as rising mortgage rates price out more and more buyers. 

That said, the housing market can expect an uptick in sales in the not-too-distant future—as home prices continue to fall and so do mortgage rates, sales will pick up with affordability. In addition, the fact that the population of 30-34-year-olds is on the rise (aka the average age at which people become homeowners) will likely contribute to more sales from sheer demand. 

The Housing Shortage May Be Helping

A lack of inventory is currently backing a severe housing shortage. The Great Recession created significantly more houses for sale than buyers to take them. In October 2007, there were 3.9 million homes on the market, but just 1.2 million in October 2022. 

The inventory isn’t expected to increase by much anytime soon, as builders have slowed their roll, but with sellers extremely hesitant to give up their low-interest rates, there’s no need to worry about prices falling dangerously in response to the spike. 

Mortgage Lending Is Safer

A massive contribution to the mid-2000s housing bubble was a truly ridiculous policy when it came to mortgage lending—or rather, lack thereof. Leading up to the Great Recession, buyers were not properly vetted (or not vetted at all), and many many mortgages were granted to those who had lied about their income and jobs, and couldn’t actually afford new houses. 

These days, mortgage standards are stricter. Lenders are careful about only giving mortgages to those who repay them, and buyers are more careful not to take on more than they can manage, largely buying within their means. 

Construction and Investing Is Staying Reasonable

While the early 2000’s bubble was predicated by a hysteria of building and investing, quite the opposite is true nowadays. After the 2008 crash, many builders went out of business as there were already far more homes than buyers. By 2020, the nation had largely come back from that period and builds were up to a manageable level in line with market activity. In 2022, building slowed and is not expected to increase by much any time soon. 

Additionally, the rising popularity of house flipping took a toll. Though the number of “flipped” houses are going down, meaning that more houses are going to homeowners rather than investors, and those who are still flipping houses are doing so with more solid, reliable loans. 

Could Rising Mortgage Rates Crash the Market? 

At the moment, many buyers have their eyes fixed on the steadily increasing interest rates from the Fed as they attempt to quell inflation. After all, at a certain point, rates that are too high will ruin many buyers’ hope for affordability, and sales will drop to crash levels. 

However, if the Fed does miss its mark and we head into a recession, economists are not concerned that it would be terribly deep or prolonged. 

And while that statement doesn’t sound terribly optimistic on its own, buyers should take a breath—just because our current market shows some similarities to the calamity of 2008, context is key, and the likelihood of a bubble is, ultimately, quite low.