Will There be a Real Estate Bubble Burst a la 2008 Again Soon? Economists Say No.

Most of us today remember the Great Recession well. We lived it. We watched the real estate market soar prior to the end of 2007. We watched as housing prices rose. We watched the real estate market soar. We watched our friends and neighbors getting mortgages for more and more expensive properties. And then we saw the bottom fall out. We saw friends and family default on their mortgages. We saw them foreclose on their properties. We saw banks failing. We saw the real estate market crash. We saw home values plummet. And we saw America’s economy enter a recession. We have lived through this. Luckily, we have also seen the real estate market and economy recover in a big way. Now, however, as we watch the real estate market enter hyperdrive with skyrocketing prices and competition, many are left uneasy. Some of the characteristics of this crazy real estate market are seemingly similar to what we watched unfold prior to 2008, many are left wondering, “Will there be a real estate bubble burst? Will the bottom fall out again?”

According to leading national economists, the answer is “no.”

Despite some superficial similarities, the answer lies at the root cause of what drove the market then and what is driving it today — and they are completely different. According to the chief economist at First American (prominent national real estate title and insurance financial services company) Odeta Kushi, the markets are fundamentally different at their core, so one should not expect the same result. On the contrary, the factors creating the market today will prevent a bubble burst like we saw 14 years ago.

Let’s first take a look at what drove the real estate crash and led to the recession in 2008. In the years leading up to 2008, lending companies were engaging in what we see today as “loose lending practices” or “predatory lending.” Corners were cut to ensure that mortgage applications went through, oftentimes without the vetting required to make sure that an applicant could actually afford the mortgage. Subprime mortgages, which are typically given to applicants with lower credit scores, or without the credit score needed for a typical mortgage, began to grow in popularity. These types of loans come with quite high risk for the lender, and when the market crashed, they paid for it. The lending practices led to unqualified buyers purchasing homes that, in essence, they could not really afford and artificially propped up housing prices. When it came time for mortgage payments, many could not make them on a regular basis, leading them down the path to default or foreclosure. When the banks that guaranteed these subprime loans had to pay the piper, many banks wound up in hot water, nearing collapse. At this point, the federal government stepped in to avoid a total economic collapse, and we entered the Great Recession.

Today’s market is seeing intense competition causing real estate prices to rise at an incredible rate. Gone are the days of loose lending practices. After the economic disaster 14 years ago, lenders tightened up their practices and implemented strategies to ensure only qualified borrowers receive loans. Today’s buyers are either cash buyers, investors with their own capital, or well-qualified buyers. Therefore, according to Kushi, we will not see a bubble burst in regards to real estate. These buyers can afford their mortgage payments. We are also not seeing the job losses that came when the economy crashed in 2008. While housing prices may not be sustainable in some markets, these factors, according to Kushi, will keep both the real estate market and the economy moving instead of grinding to a halt.

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