No one seems worried about a housing bubble. Just like last time the bubble burst

Chris Isidore byline

By Chris Isidore, CNN Business

Updated 1:34 PM ET, Wed October 27, 2021

New York (CNN Business)Housing prices are surging to new records with no end in sight. They're being fueled by historically low interest rates -- but also investors and economists' belief that the housing market has a unique ability to support runaway prices.

That's the current state of America's housing market, but it could also describe the US housing bubble that inflated from 2004 through early 2007, before prices crashed and wreaked havoc on the economy and the global financial system. That led to the Great Recession, the biggest body blow that the US economy has suffered since the Great Depression. It produced massive, prolonged unemployment and the greatest destruction of household wealth in the nation's history.

Most economists and investors aren't focused on the housing market right now. Their attention is on other factors dogging the economy, such as a labor shortage, decades-high inflation, supply chain disruptions and of course the ongoing pandemic, which has been at least partly the cause of all of those problems.

The good news is that few economists believe that the current run-up in housing prices is a bubble that's about to burst, taking the economy down with it.

The bad news is that practically no one was worried about the housing bubble in 2007, either.

Few saw the last bubble in time

Former Federal Reserve Chairman Alan Greenspan famously insisted in 2005 that there was no bubble. Instead, he said America had a large number of small bubbles in some home markets scattered around the country.

"Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels," he said in congressional testimony on June 9, 2005.

He was not alone in his assessment.

Credit-rating agencies gave top scores to mortgage-backed securities -- assets backed by the payments due on home loans with questionable underwriting rules.

Economists and investors widely believed that the questionable lending practices would be covered by the rising home values, allowing borrowers to sell the homes at a profit and pay off the loan if they couldn't afford the payments. Wall Street firms and banks rushed to buy those securities.

A building boom in the early years of this century helped to feed swelling home inventories and high vacancy rates. Still, economists believed the rising pace of home ownership meant that there was an nearly endless supply of buyers who would be able and willing to pay, despite surging home prices.

But, of course, the price increases did end. By February 2007 home prices would start to decline, losing 26% of their value before bottoming out, according to the widely followed S&P CoreLogic Case-Shiller national home price index.

Have people learned their lesson? Maybe not.

Housing prices are rising faster, higher than during the bubble

The previous record for rising home prices was a 14.4% year-over-year gain in the fall of 2005, according to Case-Shiller. The US housing market blew past that mark in April of this year, with a new record set every month since. Year-over-year prices increases now stand at 19.9%.

The median price of existing homes now stands at $352,800, according to the National Association of Realtors.

Home values stand at one third more than the peak of the last bubble in early 2007, Case-Shiller reports. And by just about every measure, housing affordability has plunged, even as near-record-low mortgage interest rates has kept home payments in check.

And yet economists forecast even more price increases ahead. Zillow projects that national home price increases will slow but not start to decline. It sees 13.6% growth from September 2021 through September of 2022, a faster pace of increase than its previous forecast. Goldman Sachs forecast earlier this month that prices would rise another 16% by the end of 2022.

Belief is that prices won't crash this time

It's enough to cause PTSD, or at least déjà vu, among those who lived through the last housing bubble. Still, many of those who rang alarm bells last time don't think we're in for a repeat of the catastrophic bursting of the bubble this time around.

"I don't think we'll see prices fall 20% to 30% once again," said Dean Baker, senior economist and co-founder of the Center for Economic Policy and Research. "I don't think there's that kind of story out there." But he cautioned that even a modest rise in interest rates could lead home prices to slide between 5% and 8%. The Federal Reserve expects it will soon start to taper the support it is providing to the economy.

Mark Zandi, chief economist at Moody's Analytics, said he is worried that the housing market is in for a hard landing. But the market and economy won't crumble like last time, he expects.

"The housing market is out of whack. It's not sustainable. It is overvalued, stretched and vulnerable as [mortgage] rates rise, and affordability gets crushed," he said. "But I'm not concerned we're going to have a crash."

He home prices increases will level out, falling in some areas of the country while gaining modestly in others.

Zandi, Baker and others believe much stronger underwriting standards on the overwhelming majority of home loans today will prevent a repeat of 2007. And the home building boom of the early years of this century is also missing -- there's no excess inventory of housing and no high vacancy rates. In fact, vacancy rates are near record lows, not record highs.

However, perhaps most bearish expert about the current housing market, Ivy Zelman, CEO of Zelman Associates, thinks the so-called housing shortage is an illusion.

She believes those estimates ignore broader trends like slowing population growth and low rates of new households being formed.

She believes the current pace of building may already be a bit greater than needed. She's worried that with the amount of building in the pipeline, thanks to outside investors entering the market, there soon could be a glut of homes on the market.

But Zelman doesn't believe there will be another collapse in housing prices like the last time. She said that a rise in the 30-year fixed rate mortgage from the current 2.9% to about 4% could be enough to send prices lower.

"A lot of what we're seeing is scary," she said. "We don't know what will happen with interest rates. Some builders are saying, 'We don't have wait lists any more.' But a lot of people are drinking the Kool-Aid and get complacent."

Too many other factors in play when housing bubble burst last time. We don't have strippers who own 5 homes, interest only mortgages, no doc mortgages, etc.

Years ago I read a market economist estimate that stuck with me. He said for every percent increase in interest rates, real estate prices decrease by at least 2%. Would you call it a bubble burst if interest rates return to their historical 7% average? That could easily be a 10% decrease in prices. Pretty sure that would have a ripple effect across he economy in a not so good way.

There is always significant social peril for those who harbor a different view than the majority, that's why "No one seems worried about a housing bubble", they don't want to be the odd man out especially in todays cancel culture world. I personally believe that you should always be prepared for the worst, kind of like having an emergency evacuation bag packed and ready to go at moments notice. In this case, it needs to have enough cash packed to get you through a couple of rough years of negative cash flows.

I wonder what we will be reading about this 10 years from now?

People forget.

I am wondering how everything is going to play out with so many things in place due to government over reaction. People quitting work, people getting fired, riots, supply chain shortage, hi inflation, and lots of unknown, ect.....What is our real GDP now and where should it be. I don't trust any numbers the government or "experts" put out. I am not sure that we should be following anyone's advice, but pay attention to what is really going on.

We have a newly reno'd vacancy coming up and the market in our little microcosm of the world is nutz.

The range of rent value is a little over 3K and there is NO, ZERO inventory of SFHs save for Winter rentals. Section 8 is paying 2875, so with the "utility allowance the LL can expect 2575.

MY concern is that the over 3K will not be a sustainable price for very long, and thats not we are looking for. Neither to I want the entitlement crowd.

In the last 4 down turns our area never lost more than 15% and always came back strong with a new base line.

I agree that higher rates will cool things down alot for those that think 5% money is too high. Those folks have little to know historical perspective nor the understanding of the risk to the lenders at stupid low rates

I don't see how we can possibly not be facing a period of high inflation, caused by the way the government is spending. Since precious metals and real estate are the traditional protections against inflation, I foresee the smart money moving quietly into real estate.

A big chunk of increased prices has been caused by the loss of spending power of our money. I see a lot of prices of things have gone up about 30% (in spite of government claims that there is no inflation). So, yes, a house is going to cost more. Anyone who sells a house for what they paid for it a decade ago has taken an enormous hit in their purchasing power.

Biggest difference I see now, just pure # of people buying and people that own multiple properties (landlords) selling because of govt over reach. In 2008, easy loans and people claim to be RE investors. So they owned 5 houses and tried being a housing provider (failed).

I was at the supermarket yesterday and a small tub of "Smart Balance" spread is now $5. I decided I didn't need the product that badly and moved on.

Personally I'm not worried about a housing bust because I sold the property I wanted to sell last fall and intend to hold on to the ones I still have.