10 Things That Are Fueling Housing Bubble Fears

With the Great Recession still close in our memories, it's understandable that a growing number of people have housing-bubble fears. The real estate market fell hard from 2008 to 2012, and while real estate prices soaring just before the crash is one of the biggest similarities, it doesn't necessarily mean we're in a bubble.

Here are 10 things that are fueling the biggest worries today and what they could really mean for the housing market.

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According to the Case Shiller Home Price Index, the median home price has increased 52% over the past five years. In many popular housing markets, homes have appreciated at even faster rates than the national average. In attempting to compete in this wild market, homebuyers are paying tens of thousands of dollars more than the asking price.

For many, this rapid price growth is reminiscent of the lead-up to the Great Recession, where home values grew 61% from 2001 to 2006. In Tampa, Florida, one of the fastest-growing markets in the country today, homes are being sold for 41% higher than the expected price, which is nearing 2007 levels and makes some worry we're leading up to another crash.

ALSO READ: Median Home Sale Price Reaches Record High of $363,975

Despite a decrease in sales activity for both existing and new home sales in February 2022, home prices are still climbing. A slowdown in sales helps increase supply, and thus, home prices shouldn't continue to grow, at least not as quickly as they have. But that's not the case right now.

The median home sales price rose 15% in February for the 120th consecutive month of price growth. There is an element of fear from buyers that home prices will only continue to soar, pushing homebuyers to pay more than asking in order to secure a home while prices are still "low." This fear of missing out (FOMO) effect could be artificially inflating prices.

As home prices and rental rates continue to soar, long-term affordability is becoming a major concern. The home price affordability index, as of January 2022, found that the median home price required homebuyers to spend 17.5% of their income on housing.

This number is much higher for renters, with 50% of major cities not having the median income to cover a two-bedroom rental, following the target of rental costs being 28% or less of income. The higher the affordability index, the more cost-burdened the homeowner or renter is, which could cause long-term challenges.

ALSO READ: Could Housing Affordability Cause The Next Housing Crash?

Mortgage delinquencies, while still well below pre-pandemic levels, are starting to rise again. A recent report from Black Knight (NYSE:BKI) stated there were 97,000 new early-stage delinquencies, meaning the borrower became 30 days behind on their mortgage.

This is a notable uptick in previous numbers and could be the initial sign that affordability is becoming a growing concern.

Foreclosure moratoriums prohibited lenders from initiating foreclosures on delinquent loans for much of the pandemic -- that was until 2022. Now that moratoriums have expired, the market is seeing a huge uptick in foreclosure starts.

In February 2022, there were 25,000 new foreclosures initiated, a 24% reduction from January 2022. In total, there are roughly 1.7 million that are 30 days or more past due and not in foreclosure.

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Inflation makes things like groceries, gas, housing, and everyday goods or services more expensive. Today, inflation is sitting at a several-decade high of 7.9%, which means the average consumer can afford less.

Budgets are already starting to thin as people worry about things like rising fuel or food costs, and inflationary impacts are just starting to be felt. Our country hasn't battled inflation like this since the 1980s, and worries over it leading to a recession are warranted.

ALSO READ: What Is Inflation?

The last economic cycle before a recession is what economists call hypersupply. It's a period when development is at its peak, eventually surpassing demand for real estate in the near future. Development levels are at decade highs right now as homebuilders bring an onslaught of new-home inventory to the market to try to meet demand.

According to the U.S. Census Bureau, in February 2022, new-home sales declined, sitting at a healthy 6.3 month supply. Six months of supply is considered balanced in the industry and indicates there is an even amount of supply to meet demand.

However, if sales continue to decline while active development is still well underway, it could teeter into an unbalanced market and leave homebuilders with a lot of unsold inventory moving forward.

Risky loans and shoddy lending practices were the primary drivers of the Great Recession, which isn't the case today. Lending standards have improved immensely, but today's challenging market has motivated lenders to bring back what some believe are risky loans, including the adjustable-rate mortgage (ARM).

Adjustable-rate mortgages lock in a lower interest rate for a set period of time before the mortgage adjusts to a higher interest rate. While attractive at first, these types of loans can leave borrowers with unsustainable payments over time, leading to higher mortgage defaults and foreclosures down the road.

ALSO READ: Great Recession: Definition, Causes, and Effects

The stock market has entered correction territory several times this year, with the S&P down around 5% at the time of this writing. While housing crashes aren't directly correlated to a stock market crash, a crash is usually indicative of a down market, which impacts investments and housing.

If a recession is what eventually causes the stock market to tip and stay in correction territory, it wouldn't be unreasonable to think the housing market won't soon follow.

In 2006, the 5-year treasury bond yield exceeded that of a 30-year bond. Many experts and economists saw this as a precursor to the recession that soon followed. At the end of March 2022, the 5-year/30-year yield inversion happened again. Some believe this is a warning sign for a coming recession.

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Even with all these mounting factors, which give valid cause for what's fueling housing-bubble fears, we can't underestimate that we are severely short on homes. Affordable housing, in particular, is desperately undersupplied, which means that despite a lot of factors indicating a bubble, housing prices could continue to rise in the near future -- or at least remain stable.

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