Tag: Recession

Why Real Estate Won’t Crash Like It Did Before

Many buyers and sellers of real estate are wondering whether we’ll see the kind of crash in real estate values that we saw in the Great Recession of 2008 onward. Experts agree that we will not.

In an April 22nd post, realtor.com explained that circumstances this time are quite different from then. Reasons cited by realtor.com’s economist, Danielle Hale, include the following:

First, the 2008 crash was created by a rash of bad mortgages — a situation that was remedied because of that crash. Second, there was an oversupply of houses for sale, whereas today there is an undersupply.

According to the realtor.com post, “There are simply too many would-be buyers out there: millennials eager to put down roots and start families, folks who lost their homes during the last recession and want to buy another property, and boomers looking to downsize.”

Lawrence Yun, chief economist at the National Association of Realtors, predicts that home sales will pick up again quickly and that prices will not fall.  He sees the luxury market taking the biggest hit, largely because the buyers of those homes may have lots of financial liquidity, but it is in stocks which they don’t want to sell while prices are low.

Also, widespread mortgage forbearance will prevent the surge in foreclosures we saw before.

Nothing Would Spur the Real Estate Market More Than Relief of Student Debt

A recurring idea among many of the Democratic presidential candidates is the payoff of student debt combined with making public universities and colleges tuition-free.

If that were to be done, I think we’d see an amazing increase in home purchases by those who are currently saddled with tens of thousands of dollars in debt. Freeing them from monthly payments of that debt could unleash a lot of buying power, and not just for real estate. Dollar-for-dollar, there is probably no investment the government could make of equal scope that would have as great a stimulating effect on the economy.

According to the Center for Responsible Lending, “Student loan debt has topped $1.5 trillion in recent years, making it the largest type of consumer debt outstanding other than mortgages. The average student loan borrower graduates with nearly $30,000 in debt.”

Moreover, according to the Center, The CFPB estimates that over a quarter of borrowers are delinquent or have defaulted on their student loan debt. Such defaults wreak havoc on the borrower’s credit rating, making home financing impossible rather than just difficult.

It’s hard to imagine the impact of having literally millions of home buyers entering the market if this were to happen. It may, in fact, prove to be too much stimulation of an already tight housing market. Meanwhile, the rental market could have the depressing impact of so many renters vacating rental units to buy their own condos and homes.

Speaking of the economy, I read an article last week that the RV industry is experiencing a 20% decline in sales, and that it’s considered a leading indicator of recessions. In my Sept. 5th column I wrote about fears of recession stoking a reduction in home buying activity, although market statistics don’t yet show that happening .

However, the article on declining RV sales got me to thinking. What makes it a leading indicator of a coming recession is that RVs are an extreme example of discretionary spending, the kind that is reduced when consumers fear for their financial future.

Well, real estate purchases are often discretionary, too. People don’t always have to sell their current home or leave their rental to purchase a home. If they are in fear of economic pain, it’s understandable that they would postpone such a purchase.

So, although the statistics don’t yet reflect such a slowdown in real estate activity, I think the prospect of that slowdown is quite real, and I’ll be watching for statistical evidence of it.

If indeed a recession is looming, relief of student debt could have a strong countervailing effect on the economy as a whole, and not just the real estate market.

Note: Some readers of this column got the impression that I supported the forgiveness of student debt. I still need to be convinced that it would be a good thing to do. The point of this column was merely to speculate on the market effect if that idea were to be implemented.

Is a Recession Coming? And, If So, How Would It Impact Real Estate Market?

We Realtors have noticed a general slowing of the real estate market over these summer months, so I’m a little surprised that the statistics don’t reflect any significant slowing. The chart below is an example.

Even while the economy as a whole has shown signs of an impending recession through traditional leading indicators, and while showings are down and we’ve seen more price reductions recently, homes continue to sell, and sold prices are not yet going down significantly.

Median sold prices progressed through the $300,000s starting in May 2015, passing $400,000 in April 2018, fell back into the 300s from September 2018 through February 2019, then peaked at $421,000 this past May. They have stayed around that range since June, falling only to $418,000 in August.

Meanwhile, real estate trade publications and websites have featured numerous articles warning of an impending recession, which is causing buyers to hold off on making offers. Last Thursday, NAR’s chief economist, Lawrence Yun, was quoted as saying, “Super-low mortgage rates have not yet consistently pulled buyers back into the market. Economic uncertainty is no doubt holding back some potential demand, but what is desperately needed is more supply of moderately priced homes.” Yun predicted the low rates to continue through the end of the year, but also predicted that the sale of existing homes will not increase. He predicts home prices will rise by 3% in 2020.

Also last week, realtor.com released a survey of 755 home buyers, 51% of whom said they expect a recession this year or next year, and 56% of whom said that if a recession does occur they would delay their home search until the economy improves.

Three days earlier, realtor.com quoted its senior economist, George Ratiu, as saying, “This is going to be a much shorter recession than the last one. I don’t think the next recession will be a repeat of 2008…. The housing market is in a better position.” The biggest wildcard is probably the President’s back-and-forth on a trade war with China and the rest of the world, and no economist (or presidential advisor) can predict that.

Realtor.com went on to say, “Aspiring buyers hoping that home prices will crash, like they did during the Great Recession, are likely in for a rude awakening. There simply aren’t enough homes being built to satisfy the hordes of buyers. There isn’t likely to be a drop-off in demand anytime soon.”

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