Seems like one thing we are never short of is ankle biters, pessimists and forecasters of doom. I know one economist who has predicted 15 of the last 2 recessions. Today’s batch who are talking about another housing price collapse are wrong, for the reasons cited below, PLUS ONE MORE, REALLY THE MOST IMPORTANT FACT OF ALL.
Back in 2008 we were on the tail end of 16 years of government interference in the home mortgage market that resulted in our government using our tax dollars to encourage people to buy houses they could not afford. As long as you could fog a mirror and lie about your income, Fannie Mae and Freddie Mac (mostly Fannie Mae) were guaranteeing loans and buying them from the brokers to repackage as safe, secure mortgage backed securities. (To see the whole disgusting story, please read “Hidden in Plain Sight”by Peter Wallison. )
The current administration is making noises about privatizing Fannie and Freddie and for me, it cannot happen too soon. But in the meantime, do not fret. We may see a price correction because all markets are cyclical, but no meltdown like 2008.
No one knows for sure when the next recession will occur. What is known, however, is that the upcoming economic slowdown will not be caused by a housing market crash, as was the case in 2008. There are those who disagree and are comparing today’s real estate market to the market in 2005-2006, which preceded the crash. In many ways, however, the market is very different now. Here are three suppositions being put forward by some, and why they don’t hold up.
A critical warning sign last time was the surging gap between the growth in home prices and household income. Today, home values have also outpaced wage gains. As in 2006, a lack of affordability will kill the market.
The “gap” between wages and home price growth has existed since 2012. If that is a sign of a recession, why didn’t we have one sometime in the last seven years? Also, a buyer’s purchasing power is MUCH GREATER today than it was thirteen years ago. The equation to determine affordability has three elements: home prices, wages, AND MORTGAGE INTEREST RATES. Today, the mortgage rate is about 3.5% versus 6.41% in 2006.
In 2018, as in 2005, housing-price growth began slowing, with significant price drops occurring in some major markets. Look at Manhattan where home prices are in a “near free-fall.”
The only major market showing true depreciation is Seattle, and it looks like home values in that city are about to reverse and start appreciating again. CoreLogic is projecting home price appreciation to reaccelerate across the country over the next twelve months.
Regarding Manhattan, home prices are dropping because the city’s new “mansion tax” is sapping demand. Additionally, the new federal tax code that went into effect last year continues to impact the market, capping deductions for state and local taxes, known as SALT, at $10,000. That had the effect of making it more expensive to own homes in states like New York.
Prices will crash because that is what happened during the last recession.
It is true that home values sank by almost 20% during the 2008 recession. However, it is also true that in the four previous recessions, home values depreciated only once (by less than 2%). In the other three, residential real estate values increased by 3.5%, 6.1%, and 6.6%.
Price is determined by supply and demand. In 2008, there was an overabundance of housing inventory (a 9-month supply). Today, housing inventory is less than half of that (a 4-month supply).
We need to realize that today’s real estate market is nothing like the 2008 market. Therefore, when a recession occurs, it won’t resemble the last one.