The Elephant In The Housing Market
We can’t hide this beast any longer. It is everywhere, television, internet, newspapers and magazines. You cannot go a day without hearing about it. And that is the belief that a recession is just around the corner. Polls taken by Duke University, the National Association of Business Economists and Pulsenomics of CEOs, analysts and economists, reinforce the belief that a recession is likely over the next year or so, if not sooner. And when the poll’s results are combined, 59.6 percent of the respondents suggested a recession during 2019 or 2020. And when 2021 was added, 85.6 percent believed a recession was in the cards during this period.
The consensus is that a recession is going to occur. Afterall, we are on the longest economic expansion in American history, and as the saying goes, what goes up, has to come down. A recession is bound to happen and the experts believe it will happen soon.
But what if a recession does happen this year or next. What does it mean to the housing market? Do we experience a repeat of 2008, and a housing meltdown? Economist say no, not happening. Jeff Tucker, the Zillow Economist put it this way. “But as we look ahead to the next recession, it’s important to recognize how unusual the conditions were that caused the last one, and what’s different about the housing market today. Rather than abundant homes, we have a shortage of new home supply”. And as George Ratiu, the Senior Economist at realtor.com said, “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.”
But what do home buyers think? According to a survey by realtor.com, 67 percent of this summer’s active home shoppers believe the U.S. will enter a recession in the next two years and 57 percent believe it will be the same or worse than 2008. In addition, 55 percent of active buyers indicated they would halt their home search if a recession occurs, anticipating lower home values and prices. The Great Recession has obviously left a lasting impression on today’s buyers.
What buyers do not recognize is that the real estate market is completely different than in 2008. In 2006 and 2007 there was over a 9 month supply of homes. Today, much less, especially in this area, with Bridgewater at 2.5, Hillsborough 2.7 and Branchburg 3.5. Plus, mortgage rates are at all time lows. So, values and pricing should not be adversely affected by a recession.
What should sellers and buyers expect of home prices during a possible recession? Well, prices did drop dramatically during the 2008 purge, hitting 19.7 percent nationally. But that was also driven by a mortgage market meltdown which affected the entire housing market.
But in prior recessionary times prices did not decrease to that extent. In fact, only once during the prior four recessions did prices drop, and that was by 1.9 percent in 1991. In the other periods, home prices actually increased, and twice more than the normal historic annual appreciation for the country (KCM research). Will we see the same appreciation in a recession as we did the past few years? Probably not. But even if a recession occurs, home prices should still increase by the normal inflation rate. Remember, a recession does not equal a housing crisis.