Why Homebuying in 2021 Is Different Than the Mid 2000s

Record home price gains in 2021 have left many drawing parallels to the price run-up leading to the 2008 housing market crash.

This is evident in the trending Google search terms. “Will the housing market crash in 2022” is a breakout term alongside “housing bubble 2021” and “something big is about to happen in the housing market.”

Taken alone, the current run-up on home prices looks bubbly. But when put in context with disposable income and the demographics of demand, the 2020’s are an entirely different animal than the mid-2000’s

Home prices vs disposable income

The mid-2000’s bubble was built on credit. Through risky and exotic loans, people were able to buy homes with little proof of savings, income, credit, or stable employment.

A manager at Jack-in-the-Box making $30,000 per year could claim he was making $60,000 per year and get a loan based on his exaggerated salary. He may have been able to get the loan, but his mortgage payments took up a disproportionate amount of his disposable income.

This disconnect shows up in the median existing home price to disposable income ratio, shown below.

US median existing home price to disposable income ratio 👇 It‘s all relative. Recent spike of home prices looks less exuberant put in relation to disposable income. Ht @PkZweifel pic.twitter.com/OvByuZe9ou

— Michael A. Arouet (@MichaelAArouet) August 25, 2021

In response to the 2008 housing market crash, the Dodd-Frank Act tightened lending standards and did away with risky exotic loans. Today, everything is documented and loans are going to much more qualified borrowers.

Even with home prices soaring to record levels, the ratio of median existing home price to disposable income is substantially lower than the mid-2000’s.

Further, mortgage debt service payments as a percent of disposable personal income is at its lowest point since at least 1980.

In the fourth quarter of 2007, mortgage debt service payments made up over 7% of disposable personal income. That figure was less than 3.5% in the first quarter of 2021.

Home prices are at record levels in 2021, but Americans are spending significantly less of their disposable income on mortgage payments than they were in the mid-2000’s.

Related: Will the Housing Market Crash in 2022?

Substantial vs speculative demand

Not only are homebuyers more financially equipped to make mortgage payments in 2021, there are droves of them still entering the market.

In the mid-2000's, price gains were fueled in part by speculative demand. People were using lax lending standards and low interest rates to buy second and third homes as investment properties, creating a hallow sense of demand. In reality, the market was facing a shortage of Gen X’ers in the prime homebuying age and an oversupply of inventory.

Today, the housing market has the opposite problem.

Demand in the 2020’s is built on a wave of millennials aging into the peak homebuying age range of 30-35. And the number of people in this age bracket is expected to grow for at least the next eight years, fueling housing demand regardless of where prices and interest rates go.

At a glance, the 2020's home price gains may look eerily similar to those of the mid-2000's. But today's market is far from a bubble waiting to burst.