With all the craziness going on in our world today, it’s hard to imagine what the rest of 2020 will hold. The stock markets are down, stores are out of toilet paper, and there are a lot of “what ifs” in the future.
So, what does this mean for the housing market? If you’re able to hold onto your job, is this going to be another 2008 situation – an opportunity to get a home for dirt cheap? Sadly for those hoping for this to happen (however good for our economy) that doesn’t seem very likely.
Check out this article from curbed.com detailing exactly why a major dip in the housing market doesn’t look to be on the horizon, the main point being: “The 2008 recession didn’t cause the housing market to go into freefall. The housing market going into freefall caused the recession.”
Sorry Millennials: a Coronoavirus-Induced Recession Won’t Help You Buy a House
The 2008 financial crisis brought the global economy to its knees and sent American home prices into freefall. For anyone who managed to hang on to their job, savings, and credit score, the aftermath of the crisis was a prime opportunity to buy a house at a bargain price.
The Great Recession is the only economic downturn millennials have lived through as adults, so, naturally, they might think that the next recession—which appears to be on the horizon because of the spread of COVID-19—will present a chance for many millennials to finally join the ranks of homeownership.
This is unlikely to be the case.
The last recession was an anomaly in more ways than one, and its effect on the housing market is the biggest outlier relative to other recessions. The 2008 recession didn’t cause the housing market to go into freefall. The housing market going into freefall caused the recession.
In the years leading up to that collapse, mortgage lenders were issuing mortgages that were destined to fail. Those mortgages were bundled into bonds and distributed across the global financial system. When people started defaulting on those mortgages, the financial system collapsed, and millions of homes went into foreclosure. Prices dropped.
In contrast, the next recession—should it hit—will be induced by cities going into lockdown in hopes of preventing the further spread of the coronavirus. Event cancelations and quarantines mean people’s purchasing behavior is changing dramatically, and industries such as restaurants and airlines will face crises. Some workers in the effected industries will lose their jobs or see their incomes vanish.
Prior to the pandemic, the housing market heading into this spring was set to be extremely competitive, as low inventory and low mortgage rates were a recipe for pushing already high prices up even further. A coronavirus-induced recession is hard to game out because there’s so much we don’t know yet, but Zillow looked at housing markets during previous pandemics and concluded that while the volume of housing transactions dropped dramatically, prices fell only a little, if at all.
This makes intuitive sense. Home prices are determined by home transactions, and without transactions, prices don’t really move. A good way to think about homebuying during a pandemic is that the housing market is simply put on pause.
Furthermore, the federal government has announced a moratorium on foreclosures on any mortgage backed by Freddie Mac, Fannie Mae, or the Federal Housing Administration (FHA) that will last at least through April. This is an important measure that will keep the bottom from falling out of the housing market because of rapidly rising foreclosures, like it did in 2008.
Also keep in mind historic precedent: As far as home prices dropping in the wake of recession, 2008 is the exception to the rule. During two mild recessions in the early 1980s, for example, home prices actually increased, just as they did in the early 2000s after the dot-com bust. Home prices are less responsive to recessions because housing is an absolute need, and because buyers tend to come from better financial situations that aren’t as damaged by a recession.
It’s also worth noting that a recession is not something to be taken lightly. Because millennials struggled in the aftermath of the last recession and have record levels of student debt, the next recession could have dire consequences for many in the generation. But if you’re in a position where you have savings, family assistance, or a job that’s likely to remain stable through a recession, there are some potential scenarios in which buying a home during a recession might make sense. Here are four of them.
What if I’ve been saving for years and just want a chance to buy something (anything)?
You might actually have a better shot at buying during a recession. The down payment is often people’s biggest obstacle to homeownership, so having money saved up will always put you ahead of other buyers, particularly those who came of age after the last financial crisis and weren’t able to build up savings (aka, millennials).
Furthermore, any uptick in unemployment might force other prospective homebuyers to dip into their savings, effectively taking them out of the homebuying market until they find a new job. This could mean fewer bidding wars and less upward pressure on prices.
What if I have a stable, fairly recession-proof job that I’ll likely hold on to?
Steady income goes a long way toward determining whether you qualify for a mortgage, which is much harder today than it was before 2008. This can help you stay in the market when the suddenly-underemployed bow out.
A recession would put a dent in demand for housing, which has been high as the economy has thrived. The problem is that housing supply still remains low. It’s possible that a prolonged recession could prompt more homeowners to sell or downgrade to a smaller house to tap the equity in their home, putting some more homes on the market. But the real effect of a recession would be a moderate impact on housing demand, which alone will only go so far toward pushing home prices down.
What if the coronavirus puts my future employment at risk, and I don’t have much savings—but have help from family on the down payment?
Any time you’re uncertain about your future employment, it’s probably best to hold off on making a large, life-altering purchase like a house, even if your family can help with a down payment. If they/you can buy a house outright, then yeah, go nuts on your piece of the American dream.
But if you’ve only got a down payment in the bank, you’re still on the hook for the monthly mortgage payment. (And if your income looks shaky to a creditor, you may not qualify for a mortgage anyway.) My advice is to hold off, and bank that down payment to accrue interest and buy into the home market once your regular income is more assured.
How do my chances look if I’d like to buy in expensive coastal markets, where prices are already sky-high?
East Coast markets like New York City, Philadelphia, and Washington, D.C., are on fairly stable footing. New York and Washington are unlikely to see discernible price drops. Philadelphia is a little softer, but don’t hold out for bargain prices, like in 2008.
The West Coast saw a temporary spike in supply, but that has all but vanished as of 2020. San Francisco, San Jose, and Los Angeles are likely to remain high-cost, low-inventory cities.
Are you in a different situation than the ones above? Tell me in the comments and I’ll help you decide if a recession will be the time to jump into the home buying market.