2 signs the US isn't in a housing bubble

• Speculation of a US housing bubble is gaining momentum.
• But two key signs point to the conclusion that the real estate market isn't in a bubble.

Home prices have reached record highs — and as affordability plummets, it's no surprise that homebuyers and experts are debating the possibility of another housing crash.

"The housing market is showing signs of froth, no doubt, "Ali Wolf, the chief economist for Zonda, a homebuilding prop tech company, previously told Insider. "Because of that, a lot of people have started to draw comparisons to the mid-2000s housing boom."

"Froth," "crash," and a bursting "bubble" are all real estate speak related to a worst-case scenario if the currently hot housing market were to cool so much that homebuyers were unable to sell their homes for more than they paid.

Earlier this month, the Federal Reserve Bank of Dallas published a report suggesting that US house prices are once again becoming unhinged from what buyers can afford as they rush into purchasing due to the fear of missing out rather than the strength of their longterm financial health.

"Our evidence points to abnormal US housing market behavior for the first time since the boom of the early 2000s," the Fed researchers wrote. This "abnormal behavior" is what has people worried about a bubble, which is defined as when the high value of an asset, like a home, isn't supported by underlying factors, such as Americans' long-term abilities to afford their homes.

However, despite signs of volatility, experts told Insider there are two key reasons why the real estate market is not yet in a bubble.

Homebuyers have a lot of purchasing power

The current housing cycle may be drawing comparisons to the real estate market of the mid-2000s – but that doesn't mean today's homebuyers are doomed to repeat history.

Odeta Kushi, the deputy chief economist at title insurance company First American, believes a housing crash similar to 2008 is unlikely to happen.

"The housing market is in a much stronger position compared with a decade ago," Kushi told Insider. "Accompanied by more rigorous lending standards, the household debt-to-income ratio is at a four-decade low and household equity near a three-decade high."

Used as a common measure of financial health, the debt-to-income ratio compares the total amount of debt a person owes each month to their income. The less debt a prospective buyer has, the more money they can put towards a home purchase.

Data from First American shows that consumer house-buying power not only remains near record levels – but that it has more than doubled since 2006. Census data also shows that nominal median household income has increased approximately 40% from that time period, which is why Mark Fleming, the chief economist at First American, says today's buyers are far better off than those of the mid-2000s.

"Recency bias may have many thinking that rates below 3 percent and house-buying power above $450,000 is normal, but it is anything but normal from a historical perspective," Fleming told Insider. "The last two years were the exception, not the rule, and the housing market is adjusting to a not-so-new normal."

The real estate market is now returning to its usual dynamics, according to Fleming. Although buyers may be worried about shifting conditions — they're actually just returning to familiar, pre-pandemic levels.

Home values remain at historic highs

The housing market's new normal comes with rapidly rising mortgage rates and dearth of homes available for sale — but that doesn't mean a bubble is brewing.

"Conditions are different from 2008, and a housing downturn seems unlikely anytime soon," Holden Lewis, an analyst at NerdWallet, told Insider. "Builders haven't overbuilt and lenders have strict lending standards. Put those trends together, and you have a housing market that's unlikely to crash anytime soon."

The nation's lack of housing inventory has led to drastic home price growth across the country. Although this has further declined housing affordability, it's also increased the value of the wealth Americans own in their home. Data now shows the average mortgage borrower currently owns about $185,000 in tappable home equity — the amount of money a homeowner can access while retaining at least 20% equity in their homes.

"When the housing market crashed in 2008 and 2009, it was because many people owed more than their houses were worth," Lewis previously told Insider. "So when they couldn't afford to make their payments, they lacked the ability to sell their homes, pay off their mortgages, and start over. They ended up in foreclosure instead."

With home prices and demand sitting at historic highs, today's homeowners are more likely to sell their properties if they become too unaffordable. So, while the real estate market may be out of whack, homebuyers are in a far better housing environment. This means a housing bubble and a crash like the mid-2000s is unlikely — at least anytime soon.