Is a New Housing Bubble Developing? Experts Say No.

Written by
Kara Johnson
Read Time: 7 minutes

Worried that housing prices are rising too high too quickly? Fretting that this could lead to another housing bubble, one that if it pops could send the country into the same kind of housing crisis and recession it saw back in 2007 and 2008?

Don’t worry too much. Housing and economic experts say that while housing prices have risen consistently in many markets, that doesn’t mean the country is seeing another housing bubble develop.

And, yes, it’s not possible for home prices to keep rising forever. But mortgage lenders and other experts say that this isn’t a bubble that will pop and lead to a rapid fall of national housing prices like the country saw in 2007 and 2008. Instead, experts who speak to are predicting a slight decrease in housing prices in some markets and a leveling off in others.

In other words? The mortgage professionals and real estate experts we interviewed say not to expect a big crash in housing prices this time.

But a slowdown in the growth of housing prices? And maybe a leveling of prices or a slight contraction in some markets? That might happen as early as this year.

“What we have now is an overheated market that I think will level off and plateau,” said Leo Loomie, senior vice president of development for Orlando-based Digital Risk, a provider of risk and compliance products for mortgage lenders. “There might be some small corrections in housing prices in regional markets. But it’s not a national issue. And that’s a big difference from the housing bubble we saw back in 2006.”

The numbers

If you just looked at the numbers, you might be forgiven for thinking that a housing bubble was about to pop.

The National Association of Realtors reported that the median existing-home price for all housing types stood at $240,500 in January. That figure was 5.8 percent higher than the median price of $227,300 in January of last year.

It also marked the 71st straight month of year-over-year gains in the nation’s median existing-home price. That’s more than five straight years of price increases.

But housing experts say that the housing market is a very different one today than it was in 2006. Mortgage lenders are more cautious. The days of interest-only and balloon-payment loans are over. And borrowers must submit plenty of paperwork to prove their incomes. Loans that don’t require income proof – so-called no-doc loans – are a thing of the past.

At the same time, housing prices aren’t soaring in all markets like they were back in 2006. There are plenty of U.S. markets, including some major ones, where home prices are appreciating slowly. There are some where they are barely rising at all.

A limited correction

This means that if housing prices do fall, it’s more likely they’ll do so in a limited number of markets, not across the entire country.

Ryan Brandenburger, branch manager of CrossCountry Mortgage in Brecksville, Ohio, said that the country is not seeing a real estate bubble -- and potential housing crisis -- developing today.

The main reason? Lenders are more careful about loaning mortgage dollars to those who can afford their monthly payments. Part of the catalyst for the housing bubble in 2005 and 2006 and the housing crisis that followed were the number of owners who stretched financially to get into homes they couldn't really afford.

That's not happening today, Brandenburger said. And the most dangerous mortgage types that helped spur the housing bubble and subsequent housing crisis are no longer as freely available, he said.

Yes, mortgage rates are low today, lower than back in 2005 and 2006. But even though this makes borrowing mortgage dollars more affordable, it hasn’t led to the same number of people getting into homes that they can’t really afford.

"The main difference between today and 2007 is the qualification necessary to obtain a home loan," he said. "Back then, you could state income -- liar loans -- whereas in today's market, you must have verified income through bank statements and tax returns."

A sound reason for rising home prices

Loomie said that housing prices today are rising for reasons that make sense. It’s not like 2005 and 2006, when real estate prices soared because consumers irrationally thought home values would continue rising indefinitely, and at an unsustainable pace.

The basic law of supply and demand is what is driving up housing prices today, Loomie said. And that’s a far more sustainable, and realistic, driver, which explains why housing prices aren’t soaring in all markets at the same rate.

“There is pent-up demand in the housing market,” Loomie said. “The Millennials are finally trying to get out of their parents’ basements and realize the American dream. A lot of folks in starter homes are worried that if they sell, they won’t be able to find a new home to buy. Builders are not building at the rate they once did because of the cost of construction. That all leads to an increase in demand and a lack of supply.”

Andrew Weinberg, principal with Silver Fin Capital in Great Neck, New York, agreed that a lack of supply of new homes is what is really driving up housing prices. This means that the steady increase in prices is not the result of speculation, which would be more likely to lead to a housing bubble ready to pop, than simple supply-and-demand.

Numbers from the National Association of Realtors back up Weinberg. The association reported that 1.52 million existing homes were for sale across the country in January. That is 9.5 percent lower than a year ago, when 1.68 million homes were for sale. The number of homes for sale has fallen year-over-year for 32 consecutive months.

"That lack of supply, particularly at the more affordable price ranges, coupled with strong demand from an improving economy, has resulted in bidding wars," Weinberg said.

Weinberg said that the sellers of, say, a $400,000 to $600,000 home in Long Island, New York, will often receive multiple offers, often above their initial asking price. This is resulting in an increase in housing prices for more legitimate reasons than the country saw in 2005 and 2006.

Not everyone, though, is entirely sure that a housing bubble isn't developing, at least in some overheated markets.

Some concerning signs

Allison Bethell, real estate investor analyst with New York City-based, said that while there is no way to be certain about a housing bubble bust, there are some similarities with today's housing market and what the country saw before the housing crash in 2007 and 2008.

Bethell pointed to the steadily rising housing prices in many major cities. She pointed, too, to housing prices that are rising much faster than inflation, something that also happened in 2008. The S&P CoreLogic Case-Shiller U.S. National Home Prices Index found earlier this year that national home prices were rising three times faster than the rate of inflation.

These are worrisome signs. But there is also evidence that the country's housing market, and the lenders who pass out mortgage loans, are different than back in 2005 and 2006.

"Lenders haven't been as lenient with their lending criteria as they were prior to 2008," Bethell said. "You rarely find no-doc loans with stated income anymore. In my opinion, some warning signs are there, but I don't think it will be as big of a crisis as it was before."

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