3 Ways the Next Housing Bubble Will Be Different Than 2008

As with everything else in the world, housing values are in a state of flux.

In case you haven't heard, the housing market is about to explode like a giant balloon at a gender reveal party.

Or not.

Predicting what's going to happen in the housing market with any certainty is a fool's errand. We can speculate based on history, but there's never been a market quite like this one.

The Federal Reserve of Dallas weighs in

Here's something we know for sure: Nothing stays the same, and when changes do come to the housing market, those changes will be felt by millions.

According to researchers from the Federal Reserve of Dallas, there's a storm a-brewin'. Okay, what they actually said is that there are "signs of a brewing U.S. housing bubble." To bolster the point, the Fed points to these three factors:

1. Prices have increased at a rate that cannot be justified by economic fundamentals.
2. The current rate of home price growth is unsustainable. Double-digit price increases cannot go on forever.
3. Interest rates are on the rise.

While the Fed noted that the rapid rise in home values does not necessarily point to a bubble, it is one big, important piece of the puzzle.

Redfin notes changes in the housing market

According to real estate giant Redfin, buyer behavior has changed over the past few months. Here's what Redfin is seeing:

• As mortgage rates shoot up at the fastest pace in history, the typical home buyer's mortgage payment is now $500 more per month than it would have been if they'd purchased a home in January.
• Some buyers have stepped back from the house hunt as mortgage payments now exceed their budgets.
• Fewer people are starting online home searches.
• Fewer people are applying for mortgages as compared to this time last year.
• An increasing number of home sellers have reduced their asking price.
• The number of homes that are selling within 14 days is growing at a slower pace than earlier this year.

Still, when and if the housing market does take a hit, here are three ways it's likely to be different than it was in 2008.

1. It's likely to be a slow leak

We can say this for sure: An exploding housing bubble will not sneak up on us. We talk (and write) about it incessantly. We know there's a change in the air and something is going to happen. The mystery is what that change will end up looking like.

While the Dallas Fed sees a "bubbly" housing market, there's no indication it's going to be anything like 2008. The primary reason is that Americans are using less of their disposable personal income to make mortgage payments. Back in 2007, 7% of disposable income went toward mortgages. As of 2021, it was 3.8%. That leaves more disposable income to do things like cover emergencies and deal with inflation.

At some point, the convergence of low housing inventory and sky-high prices will simply slow the market to a crawl. When that happens, prices have to soften to lure in buyers.

2. There are likely to be fewer foreclosures -- at least early on

To put it kindly, lending practices were sloppy leading up to the 2008 housing crisis. Mortgage lenders found a way to offer loans to just about anyone with a pulse, including those who had no way of repaying the mortgage.

Due to new federal guidelines and dramatic changes in the lending industry, those types of loans are a thing of the past. If you've recently purchased a home, you know the hoops you had to jump through to prove you're able to repay the debt. What that means for us as a society is that there are likely to be fewer homeowners going into foreclosure, even if the value of homes flattens.

The folks who might face a challenge are those taking out adjustable-rate mortgages (ARMs) and paying more for a home than its appraised value. According to the real estate company Inman, the demand for ARMs has increased by 26% from earlier this year. As fixed 30-year mortgages hover just over 5%, the current rate for a 5/1 ARM is around 3.5%, meaning a buyer can qualify for a more expensive home. The problem is that the rate is only set for five years and there's no way to predict what the rate will be when it's time to reset. Any homeowner unprepared to pay a higher interest rate could find themselves in trouble.

3. We're all (hopefully) a bit savvier

There's no doubt the current market is being driven, in part, by emotion and a fear of missing out. That said, anyone who remembers the crash of 2008 understands phrases like "underwater" (owing more on a home than it's worth) and "short sale" (selling a home for less than the amount they owe on the mortgage).

No matter what the housing market looks like in a year or two, we're all in a better position to plan for it.