Remember the housing market crash and Great Recession in 2008?

It represented the second-largest recession we’ve lived through, junior only to the Great Depression. Given that a real estate bubble largely caused it, many Americans worry about Housing Crash 2022.

I get it. Median home prices skyrocketed 19.9% from the end of January 2021 to the same time in 2022. Frothy looking numbers, and raising concerns about a housing bubble in the US.

Here’s what the data shows about whether we’re experiencing a real estate boom or bubble — and exactly how housing bubbles work.


What Is a Housing Bubble?

To better understand if there’s a real estate bubble we need to first understand what exactly a housing bubble is.

A housing bubble forms when home prices rise higher than the market’s fundamentals can justify. Fueled by speculation rather than inherent demand for housing, these artificially high property values prove unsustainable over time.

Imagine a neighborhood that appreciates steadily for eight years in a row. Speculators notice, and begin offering a premium for those homes greater than their market value, increasing demand. In turn, homeowners begin selling at inflated prices because of the increased demand, but since there are limited homes, supply is stagnant, leading to increased housing prices.

At a certain point, demand dries up because no buyers are willing to pay the inflated prices. The artificially high prices come crashing down, thus causing the bubble to “pop.” Sure, there are other factors that can contribute to a housing bubble, but this general outline offers an idea of what a housing bubble is.


Housing Bubble Timeline

Going a step further, real estate bubbles typically go through four predictable phases.


Phase 1: Properties in Demand

It starts with a market where people actually want to live.

The housing demand is real, and causes prices to rise faster than the surrounding areas. That begins to attract both speculative investors and homebuyers reaching beyond their comfortable price range.


Phase 2: Expectations of Appreciation

In the second phase, excitement and high expectations begins spilling into the decision-making process. Buyers assume that prices will continue appreciating at the current faster-than-average rate.

That assumption of future growth, rather than market fundamentals like local incomes, fuels higher pricing. See the circular logic?

“I’ll pay more for this property because I know future buyers will soon pay even more.”

That sense of buying frenzy spurs developers to build ever more supply as well. But it takes time to build homes and apartment buildings, often measured in years, which means developers fall behind the market fundamentals.

Here’s what the housing market cycle looks like visually:


Phase 3: Inflated Purchase Price

When demand starts becoming fueled by the expectation of price increases, rather than by local residents desire to move in and their ability to afford it, home prices start inflating artificially. Some buyers reach beyond their comfortable budget, aided by low-down-payment loan programs and loose income requirements.

And it works — for a little while. It creates a self-fulfilling prophecy, a feedback loop of higher prices fueling more demand with the expectation of further appreciation.

It doesn’t last.


Phase 4: The Bubble Bursts

Once homebuyers and speculators realize it costs more to live in the neighborhood or city than it’s actually worth, demand begins to dry up. Prices stagnate briefly, then when sellers can’t find a buyer, they lower their prices. It happens slowly at first, but once it becomes clear that there’s no demand at current pricing, demand falls even further.

Some homeowners end up underwater on their mortgages as prices fall. If they start defaulting on their loans, a wave of lower-cost foreclosures hit the market, driving prices even lower.

Investors don’t want to touch the area, and homeowners won’t either until prices drop enough for them to feel like they’re “scoring a deal.” Which eventually happens: prices go so low that the neighborhood becomes attractively priced again.

And the cycle starts anew.

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The Case for a Real Estate Bubble in 2022

The odds of a nationwide Great Recession-level housing bubble are certainly less likely than they were in 2006. That resulted from a perfect storm of loose lending practices and poorly-regulated investment bankers creating derivatives that no one else understood.

But when prices increase at a pace in the double digits, alarm bells should ring. At the very least, it calls for deeper research into a housing crash in 2022.


Ratio of Home Prices to Incomes

Since 1965, US home prices have risen by 118% in inflation-adjusted dollars (from $171,942 to $374,900). But inflation-adjusted median incomes have only risen 15%, from $59,920 to $69,178. 

That means home prices have risen 7.6 times faster than incomes, from 1965 through the end of 2021.

And much of that comes since 2008, when home prices were considered far overpriced. Since 2008, real estate prices have risen 3.1 times faster than incomes (again, adjusting for inflation). 

In 2000, the average home price-to-income ratio was 3.0. The median home cost three times what a median family earned in a year. That’s still higher than the 2.6 ratio that economists target as “healthy.”

By 2021, that ratio of real estate values to incomes had jumped to 5.4 times. That’s more than double the ratio that economists recommend.


Fed Real Estate Exuberance Index

Consider another metric indicating a housing bubble. After the 2008 housing bubble burst, the Federal Reserve created a new indicator called the Fed Real Estate Exuberance Index. It calculates a complex figure called the “critical value” for nationwide home prices, based on a wide range of economic fundamentals. It then compares the critical value to another complex calculation called the “exuberance indicator,” designed to measure “explosive behavior” in real estate markets.

If the exuberance indicator exceeds the critical value for more than five quarters in a row, it raises red flags for a housing bubble. And the last five quarters have all been in bubble territory.


The data above doesn’t include the second half of 2021, during which home prices accelerated even as inflation gutted gains in income growth. Expect the exuberance indicator to leap even higher in late 2021 and early 2022.


The Case Against a Housing Bubble

Most housing experts believe the US is experiencing a housing boom, not a bubble.

To understand why real estate experts don’t see a housing bubble about to burst, consider the following facts.


Housing Supply Shortage

The greatest case against a real estate bubble is that the US has a housing supply shortage. The National Association of Realtors (NAR) reports that the homebuilders have failed to keep up with household growth and demand, underbuilding by at least 5.5 million units over the past 20 years.

Check out this graph from Quartz, tracking the tight supply of homes versus the national home price index:

limited supply of homes for sale vs property prices

It’s hard to imagine home prices plummeting when there just isn’t enough housing to go around.


Millennials Reaching Prime Homebuying Age

Millennials now make up the largest generation in the US. And with most now in their 30s (and early 40s, as I can attest), they’ve all reached their prime homebuying years.

Despite all the speculation back in the early 2010s, millennials really do want the same suburban lifestyle as their parents and grandparents before them. They want to grill burgers in the backyard, with their golden retriever and 2.1 kids. And many of them are first-time buyers, moving from urban apartments to larger homes in the ‘burbs.

All of which continues to drive demand among prospective buyers.


Annual UBS Report

Every year, UBS releases a report measuring housing bubble risk in cities across the world. The 2021 UBS report marks several US cities as “overvalued,” but none at risk of a bubble. UBS bases their bubble risk index on five standardized city sub-indexes: price-to-income and price-to-rent (fundamental valuation), change in mortgage-to-GDP ratio and change in construction-to-GDP ratio (economic distortion), and relative price-city-to-country indicator.

housing bubble about to burst

The coronavirus pandemic certainly played a role in superheating demand for real estate. To begin with, people wanted more space, contributing to the de-urbanization trend and spiking demand for suburban real estate and smaller cities.


Cooling Growth Expected

Extremely low mortgage interest rates also contributed to skyward property prices. When it’s cheap to borrow, people can afford to spend more on real estate. They can spend more money for the same monthly payment.

But that’s about to change, as the Federal Reserve has made clear its plans to raise interest rates several times in 2022. Rising mortgage rates generally cool down real estate markets, and presumably turn down the frothiness.

Investors have also flocked to real estate as a hedge against inflation. As inflation cools, that may also ease demand for real estate without collapsing it.

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So, a Housing Bubble in 2022?

While a handful of local markets appear overvalued, most analysts believe the US doesn’t face a housing bubble in 2022. forecasts existing home price growth of 2.9% in 2022. While existing home inventory listed for sale dropped 18% in 2021, they expect it to rise slightly in 2022. Meanwhile, estimates housing starts will rise by 5%, compared to 15% in 2021. Nowhere near enough to meet the increase in demand for single-family homes.

If a recession hits, that changes the calculus. Far fewer people will feel comfortable shelling out huge sums for homes. The University of Michigan Consumer Sentiment index sits lower than it has since 2011, largely due to inflation worries.

However, US gross domestic product (GDP) keeps improving. Most analysts predict continued economic growth as the world emerges from its pandemic woes.

In short, most housing markets across the US appear strong and healthy. Lending practices remain tighter than in 2006, despite loosening over the last five years.

To find undervalued markets, see our research and lists of the best cities for real estate investing in 2022, and the cheapest real estate in the US.


How to Invest in a Housing Bubble

Worry a housing bubble is about to burst?

While I don't foresee a real estate bubble imminent in 2022, you might. Understand what investing through a bubble should look like, and how to protect yourself.


Buy Discounted Properties, Rather than Trying to Time the Market

First, don’t attempt to time the market. Market timing usually comes down to luck, and most of the time you’ll miss out on large market moves in pursuit of short-term gains.

If you wait for the next dip to buy, it could be years away. By that time, even the low point in the dip could mean higher prices than today’s values. Alternatively, if you rush to jump into a rapidly appreciating market, you risk buying in the midst of housing bubble mania.

Instead, dispassionately look for an investment that you can buy at a discount from market value. See our guide to finding deals on real estate even in a hot market for specific tactics, and look for motivated sellers. You can use an online tool like Propstream to find them instantly (full Propstream review here), or stick with classic strategies like driving for dollars or buying foreclosures.

For those of you who invest in stocks, think of it like value investing. Even in 2006 when home prices peaked, there were still plenty of undervalued markets and individual homes. From peak to trough of the housing crisis, the state of North Dakota averaged only a 2% decline in property value.


Avoid Speculation

Look for markets with steady but reasonable gains, rather than sharp spikes in home values. Sudden leaps in pricing often mean a divergence between incomes and home values.

Your real estate investments make up one part of a larger portfolio. Just like selecting stocks, you don’t want to speculate a large part of your portfolio.


Invest for Cash Flow

Most of all, to survive a housing bubble you’ll want to identify properties with strong rental cash flow. Rents tend to remain stable or even increase through any economic cycle. Even during the Great Recession and housing bubble of 2008, rents did not decline – they simply grew less quickly than they did previously. In a recession and real estate bubble, some homeowners end up becoming renters, which fuels demand for rental housing even as buyer demand dips.

The moral of the story: aim to buy properties that become real estate cash flow machines! Properties you can buy below-market value, but for the right reasons. It can be a real estate market that’s not seen by investors, small communities or a location that ignores typical recession factors.

Fortunately, you can calculate a property’s cash flow before buying. Use our free rental property calculator to run the numbers on any property, and never buy a bad deal again.

For more tips for investing in any phase of the housing cycle, see our tips for making money during housing market corrections.


Final Thoughts

Does the U.S. face a housing crash in 2022? I believe the odds are low, at least as a nationwide housing bubble in the US. The economy continues to expand, and the supply of homes doesn’t meet current demand. Subprime mortgages make up a much smaller percentage of the total outstanding loans on the market.

Still, do your due diligence when evaluating potential deals. Make sure you have a firm understanding of the local market. When you know the local market and the prospective property well, you can predict your cash flow and returns accurately.

And in doing so, protect yourself from losses in the next recession or housing bubble.


Do you think your home city is in a housing bubble about to burst? Why or why not? Share your thoughts below!



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