On October 4, The Laurie Moore team with Fairway Independent Mortgage took the time to hold a forum to discuss the question that has been looming on everyone’s minds lately: Are we headed for another housing recession?
Around 2007-2009 the U.S. had one of its biggest housing market crashes ever. Though the crash was due to multiple things, the carnage in the aftermath of the crash was in large part due to Lenders taking more risks in lending people money without qualifying them for what they could actually afford. After the crash, people could no longer pay their lofty mortgage payments and lenders had dug themselves, as well as their borrowers, into a very deep hole. This led to vast amounts of foreclosures as many had to cut their losses and walk away from their homes, left trying to pick up the pieces of what remained of their lives. This crash led to a recession which has been called the worst recession since World War II.
So, what does the word recession really mean? Well, it’s defined as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters” (Merriam-Webster Dictionary – Laurie Moore Team). According to the Wall Street Journal (from a survey of economists) and Pulsenomics (from another survey of economists and analysts), the next predicted recession is said to occur in 2020. The Wall Street Journal stated, “The economic expansion that began in mid 2009, and already ranks as the second longest in American history, most likely will end in 2020 as the Federal Reserve raises interest rates to cool off an over-heating economy. “ The Wall Street Journal also went on to say, however, that recessions are notoriously hard to predict and that forecasters saw chances of recessions back in 2011, and in 2016, yet both turned out to be false alarms.
The predictions of the year a recession will most likely take place varied between both companies mentioned above. The Wall Street Journal survey of private-sector economists predicts a 59% chance of slowdown occurring in 2020, while only an 8% chance the year before and a 22% chance the year after. Pulsenomics survey of economists, investment strategies, and real estate market analysis predicts a 48% chance of slow down in 2020, with a 24% chance the year before and a 14% chance the year after.
According to their predictions, we still have a few more years left of the economy’s current expansion, and even if we have another recession, it will not be nearly as bad as it was in 2008. Why? The financial system is more resilient now, which will help the housing system not fall in the next economic storm. Factors that ARE predicted to be a part of the next economic trouble are Market Policy, Trade Policy, and possibly a Stock Market correction. On this ranking of triggers for the next economic slowdown, the housing market was ranked 9th in probability to be a trigger. That’s good news! What is also good news is that they predicted that home values will continue to appreciate through 2022.
With houses appreciating so much in the past few years, it would be very easy to compare this to the last recession in 2007-2009 when housing prices were rising rapidly right before the crash. However, the two situations are immensely different. Today, there is a pent up buyer demand, meaning there are many people looking to buy now that the market has stabilized and begun to appreciate. The current inventory of houses is also low, well below the normal of 6 months in most areas and price ranges. This means there is not a glut of inventory like previously and if we do have a weakening of the housing market, it will simply return to normal rather than be in a peaking state.
4 Reasons Why We Are Not Headed Towards Another Housing Bubble:
1. Home Prices: While prices have reached the same levels as they did in 2006 in many markets across the country, with inflation they should be much higher than what they actually are now.
2. Mortgage Standards: The standards on lending today are nowhere near as lenient as they once were when the crash happened.
3. Foreclosure Rates: “A major cause of the housing crash last decade was the number of foreclosures that hit the market. They not only increased the supply of homes for sale, but were also sold at 20-50% discounts, which helped drive down all home values” (Laurie Moore Team).
4. Housing Affordability: Home affordability today is far better than the last housing boom. The mortgage payments homebuyers have committed to paying still remain much lower than pre-crisis peaks. Even though the price of homes may seem to be getting high, the actual cost is still below historic norms.
In conclusion, while a slight economic slowdown seems inevitable, it will not be anything near as bad as the market bubble bursting like before. The key words here are an ECONOMIC SLOWDOWN and NOT a Housing Crisis.