Real Estate Poised to be a Driver in the Economic Recovery

The housing market is booming amidst an economy that remains unstable. 2008 is still visible to everyone in the rear-view mirror and it is hard in the era since to separate “recession” from “housing crash” in our minds. This time around it seems the very thing that caused the 2008 Financial Crisis might be a driving force in our recovery. Fortunately we were wise enough to categorize real estate as an essential business because it has such a tremendous effect on local economies. But how do we know this time is different?

Home Equity is High

According to John Burns Consulting, 58.7% of Americans have at least 60% equity in their homes. This is dramatically different than in 2008 where homeowners found themselves owing more than their homes were worth, primarily due to sub-prime lending.

Shortages of Home Inventory

Over the last ten years we’ve had historically low levels of inventory and that is even tighter now than ever! In Tahoe Donner alone there are currently only 18 homes listed for sale and there are 64 under contract! This basically translates to a 2 week inventory.  A healthy market has a 3 month inventory of available homes.

Robert Dietz, Chief Economist for the National Home Builders Association (NAHB) says:

“As the economy begins a recovery later in 2020, we expect housing to play a leading role. Housing enters this recession under built, not overbuilt. Estimates vary, but based on demographics and current vacancy rates, the U.S. may have a housing deficit of up to one million units.”

The under supply, coupled with increased demand for Tahoe and Truckee homes as people from the Bay Area relocate as remote work is at the very least the pandemic norm, is  extremely competitive and driving prices up. Many thought we had hit the top and were approaching a recession prior to the pandemic. When the pandemic and economic recession accompanying it arrived it felt inevitable that the house market would be in recession as well. We have been proved completely wrong on that as demand across the country soars. More acutely in the North Lake Tahoe Truckee region we are seeing a huge influx of full-time residents now that many are working remotely for the foreseeable future.

Sub-prime Lending No Longer Exists

The Mortgage Bankers Association releases an index a couple times a year, the Mortgage Credit Availability Index, which indicates the availability of funds for mortgages. Prior to the 2008 Financial Crisis the MCAI was extremely high, which means it was easy to get a mortgage and lending standards were very loose. Immediately afterwards lending standards tightened to such an extreme that the MCAI was extremely low and it was incredibly difficult to get a mortgage. Though it has gotten easier since the early years post-Financial Crisis to obtain a mortgage, the MCAI remains well below where it was leading up to 2008. As the coronavirus enveloped the world and sent us all into hiding the MCAI took another plunge this spring. The volatility and drops of the stock market caused investors to pull out of stocks and not re-invest in bonds, which is what normally happens. The lack of money in bonds created a lack of money to back mortgages with which caused lending standards to contract. We are nearly as far away as we could be from the lending standards and credit availability of pre-2008.

Home Price Appreciation is Steady, Not Out of Control

There have been years since the Financial Crisis that have paralleled and surpassed year-over growth leading up to the Crisis. However appreciation has slowed in the past few years. The graph below shows a comparison of year-over appreciation nationwide of the years leading up to the Crisis and of the last few years. In fact year-over growth in the Tahoe Truckee area was even lower than it was nationwide in 2019. We have definitely been experiencing more sustainable levels of growth over the last few years as opposed to pre-2008. The strength of the real estate is showing to actually be a huge factor in the economy recovering.

In a recent post, Odeta Kushi, Deputy Chief Economist for First American explained:

“While the housing crisis is still fresh on the minds of many, and was the catalyst of the Great Recession, the U.S. housing market has weathered all other recessions since 1980. With the exception of the Great Recession, house price appreciation hardly skipped a beat and year-over-year existing-home sales growth barely declined in all the other previous recessions in the last 40 years…In 2020, we argue the housing market is more likely poised to help stave off recession than fall victim to it.”

Whether buying or selling, we are finding ourselves in a healthy market that is accelerating the recovery.