You Need A Bubble for A Crash: Insights Into our Economy and the Housing Market
Are We Headed Towards A Recession?
Lately I feel like you can’t have a conversation about real estate without someone suggesting there’s a recession on the horizon. While this may or may not be true, there have been signs to suggest we may be on the brink of a recession. The question that constantly follows that is whether we are also on the brink of a housing crisis.
The potential trade war with China and the tariffs in place have had an impact on the US economy. This is being felt in the manufacturing sector most directly due to reliance on foreign products, like steel, that are being tariffed. Other sectors who are also reliant on imported materials are feeling the squeeze. Building costs, for example, have risen with the tariffs. This impact is trickling beyond the sectors directly impacted and on to the US consumers. The world economy is slowing down as well so some thinks it’s only imminent that we too shall slow. As we have been in an appreciating market for nearly a decade, with some down swings along the way, it is likely that we will experience a recession in the not too distant future. With the FED lowering interest rates for the first time since the Great Recession, people are a=concerned that is because of an imminent recession. The FED sees it differently, but more on that later. After the Great Recession in 2008 we are suffering from PTSD and so it is natural that we immediately correlate any potential recession with a drastic depreciation in the housing market.
Calm Down Everyone! This Is Not A Bubble!
For years it has been being discussed whether the current housing market is a bubble and will come crashing down before us. Again, PTSD. When you look at the last 5 recessions, however, average home prices depreciated in 2. The Great Recession suffered major depreciation and the other only had a 1% depreciation. Average home prices actually appreciated in the other 3 most recent recessions! The Great Recession was tied so tightly to the housing market and it is incredibly difficult in the aftermath to separate the 2 in our minds.
To ease fears of a housing crash it’s important to look back at what experts have been saying for years regarding the non-existence of a housing bubble.
Home Prices: Yes, home prices have in most cases surpassed the 2006 highs and we have experience historical growth to get us there. However based on inflation alone homes should actually cost more than what they do.
Mortgage Standards: Many institutions have eased standards since the early years of the Recession when it was incredibly difficult to get a loan. However there are many indicators that show that there currently is a much lower likelihood of homeowners defaulting on their loans. Current standards have brought much more qualified buyers to the market than prior to the Great Recession.
Foreclosure Rates: Once a hefty part the real estate market, so much so that some agents even based their business on REOs, foreclosures and other distressed sales are nearly non-existent in the current housing market.
Housing Affordability: Contrary to popular opinion, it is actually more affordable currently to buy a home than pre-Recession! This is due to the historically low interest rates. While we quibbling about interest rates rising from 3.85% to 4.15% it’s good to reflect back on what interest rates once were. At the previous peak of the market interest rates were around 6.7%! But really this was low in comparison to the 7-8% we were hovering around for most of the 90’s and the 10-13% averages in the 80’s! We are so blessed to be able to complain about the small increases we’ve been experiencing! Interest Rates from 1977-Now
You Need a Housing Bubble for the Housing Market to Crash
What it all boils down to is that no one has a crystal ball. We will not know when the next recession is coming until we are in. Experts agree that after such a long period of growth it is likely we will hit a recession in the not too far off future. Yet Fannie Mae, Freddie Mac, and the Mortgage Bankers Association all believe that the housing market will continue to grow far into 2020. Based on inventory levels and demand for housing I tend to agree. My motto is “You can only do what you can do when you can do it”. Don’t look back and wish you had it all together back when and don’t agonize about what the future is looking like. Focus on the now.
