Americans are unlikely to lose their homes if the housing bubble bursts

  • There is a growing imbalance between supply and demand in the real estate market.
  • As house prices soar, many fear a repeat of the 2008 foreclosure crisis.
  • But two economists told Insider that’s unlikely. The owners have a lot more financial power this time around.

Housing affordability may be plummeting, but that doesn’t mean Americans risk losing their homes if the housing bubble bursts.

Home prices have hit new highs as buyers continue to battle for the limited number of homes available for sale. As the imbalance worsens, fears of a second foreclosure crisis, like the one in 2008, have flooded financial markets and the Twitterverse.

Odeta Kushi, chief economist at First American, thinks that’s unlikely to happen for two reasons. Both are tied to the fact that homebuyers are in a much better financial position than they were in 2008.

“First, the housing market is in a much stronger position than it was a decade ago,” Kushi told Insider. “Along with tougher lending standards, the household debt ratio is at a four-decade low and household equity is near a three-decade high.”

The debt-to-income ratio is a common measure of financial health that compares the total amount of debt a person owes each month to their income. It is taken into account in mortgage applications.

Despite inflation hitting its highest level in 40 years in February, Americans still have considerable wealth at their disposal. Collectively, households gained about $2.5 trillion in excess savings during the pandemic and more than half of US states recorded their strongest of all time personal income growth in 2021. The average mortgage borrower currently owning about $185,000 in exploitable equity – the amount of money a homeowner can access while maintaining at least 20% equity in their homes – the Covid-19 housing market bears little resemblance to the housing bubble that gave rise to the crisis 2008 foreclosures.

Holden Lewis, an analyst at NerdWallet, told Insider he agrees.

“When the housing market crashed in 2008 and 2009, it was because a lot of people owed more than their homes were worth,” Lewis said. “So when they couldn’t afford to make their payments, they didn’t have the ability to sell their homes, pay off their mortgages, and start over. They ended up in foreclosure instead.”

It won’t happen this time, he said. According to Lewis, the real estate market is in a much better position as banks and lenders have raised standards for acquiring loans.

“Back in 2008, the saying went, if you could fog up a mirror, you could get a mortgage,” he said. “Lending standards were lax and borrowers didn’t even have to prove they were making enough money to pay their monthly payments.”

Lending standards are stricter today than they were in 2008. The US government has since enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act to help to prevent some of the predatory lending practices that spurred the subprime mortgage crisis. No down payment mortgages are almost unheard of and borrowers have to go through larger hoops to qualify for a mortgage.

All of these factors, combined with historically high house prices and strong buyer demand, mean US homeowners are doing well.

“If buyers can’t afford to pay their mortgage, they can sell their home, pay off their mortgage in full, and avoid foreclosure,” Lewis said. “There will be few foreclosures for the foreseeable future, which means a real estate crash is unlikely.”

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