Have you heard any negative economic rumors circling the water-coolers lately? Something about a “looming recession?” Or even the possibility of another “housing crisis?”
Well, if you’ve been watching the news, or scrolling through the internet then chances are that you have…it’s everywhere in the media these days.
So, what exactly is going on with our economy?
Are we heading into an economic tailspin where we could see home prices plummet across our city or town? And why is everyone so panicked about it?
These are all great questions that need some perspective and context. And the end takeaway of this long-worded post is to dispell the rumors that a looming recession in 2020 is going to cause another housing crisis similar to that which we experienced in 2008.
Now, let’s first dive into this “looming” recession and actually take a minute to explore exactly what’s going on. In order to have a recession, we first need to be in a “booming” economy, and currently, that’s exactly what’s been happening. Today we are experiencing the “longest economic recovery in modern American history,” and, because the economy functions in cycles of growth and restriction, it’s no wonder that everyone keeps insisting that a slowdown, also known as a recession, is just on the horizon.
The definition of a recession, also known as a period of economic slowdown, is merely two-consecutive quarters of slipping, or decreasing, growth in our GDP – Gross Domestic Product. As you may recall from your high school economics class, the Gross Domestic Product measures the value of economic activity within a country…which would be the sum of the market values, or prices, of all final goods and services produced during a period of time.
Simply stated, a recession is an economic slowdown that occurs at the end of a period of economic expansion…
Now we can better understand why media is spouting recession all over the evening news…because our current economic growth cycle is way overdue (historically speaking) for a slowdown. But, what’s important is to know is that there is a distinct difference between a “recession” and a “housing crisis.” Our current economic recovery WILL and IS slowing down. But, this does NOT equate to a housing crisis.
A housing crisis occurs when housing prices plummet due to a sharp decrease in demand and affordability resulting from excessive risk-taking, loose borrowing guidelines, and over-leveraging of housing, leaving many homeowners underwater, unable to sell, or unable to tap into their equity.
The last housing crisis we had was in 2008 and was NOT a result of the recession we experienced. Rather, the housing crisis was the actual CAUSE of the recession in 2008.
Looking back at the main reasons likely to be attributed as causing our last recession in 2008, leading economists were polled and they agreed that the top triggers were: #1. The Housing Crisis; and #2. The Mortgage Meltdown.
What we have to realize is that times were different in the years leading up to the last recession that occurred in 2008. Lending guidelines were incredibly loose and were allowing for the over-leveraging of real estate as well as excessive risk-taking as many lenders didn’t even check a borrower’s credit rating, income or assets. And, when the bubble burst and home values began to fall, homeowners were unable to get out of their subprime mortgages because they were over-leveraged in their homes. So many were forced to sell, or worse yet, walk away from their homes.
In comparison, today’s lending guidelines are very conservative requiring full credit, income, and asset verification. Added, most homebuyers are putting 20% or more down on the homes they purchase and have been locking-in extremely low-interest rates on fixed-rate mortgages…
Plus, our demand for housing is much higher as we’ve continued to experience population growth far exceeding the growth of our housing supply. These conditions ALL support a very stable housing market, and stable real estate values.
Now, looking towards our “looming” recession to come, the leading economists recently polled considered that the most likely triggers of any future economic slowdown will most likely be:
#1. Trade War; #2. A correction in the stock market; and #3. An undefined geopolitical event affecting the world economy.
And to provide some context, in the same poll, a housing market slowdown was considered as the 9th most likely trigger to cause a coming recession, which isn’t a very serious threat and is also in stark contrast to the economic condition leading up to the housing crash in 2008.
BUT, more important to note, the same economists in the same poll also stated that they actually forecast that housing prices, although slowing down, would still appreciate upwards of 6% nationally through any pending economic slowdowns to come.
What’s been overlooked by the current panic is that home values do not necessarily have to decrease during a time of economic slowdown. Rather, home values actually increased in three (3) out of the last five (5) recessions, and decreased by less than 2% in the 4th.
When trying to understand the likely effects of any economic slowdown, it’s most important to look at the most likely cause of such a pending economic slowdown. And, more likely than not, based on the likely causes of the looming slowdown coming in 2020, it will be but a blip on the radar in home value appreciation as housing will not be the trigger, and home values will most likely still continue to appreciate.
Of course, I’m not suggesting that prices won’t ever dip. Even in a balanced housing market, we experience dips in housing prices due to seasonality of inventory levels, but I highly doubt we’ll actually experience any sharp declines in home values this time around.
So, if you’re considering to make a purchase in real estate this year, or next, now you have some insight into what to expect. Plus, one additional key insight to note is that during a recession is the time when most Americans pull their money from the stock market and invest in real estate for stability, as typical stock market losses during a recession can equate to as much as a 25% loss in value.
Well, I hope this information is helpful…and remember, don’t PANIC…your home is, and will always be, one of the most financially stable and rewarding investments you can make!