With the housing crash of 2006-2008 still visible in the rear-view mirror, many are concerned the current correction in the stock market is a sign that home values are also about to tumble. What’s taking place today, however, is nothing like what happened the last time. The S&P 500 did fall by over fifty percent from October 2007 to March 2009, and home values did depreciate in 2007, 2008, and 2009 – but that was because that economic slowdown was mainly caused by a collapsing real estate market and a meltdown in the mortgage market.
This time, the stock market correction is being caused by an outside event (the coronavirus) with no connection to the housing industry. Many experts are saying the current situation is much more reminiscent of the challenges we had when the dot.com crash was immediately followed by 9/11. As an example, David Rosenberg, Chief Economist with Gluskin Sheff + Associates Inc., recently explained:
“What 9/11 has in common with what is happening today is that this shock has also generated fear, angst and anxiety among the general public. People avoided crowds then as they believed another terrorist attack was coming and are acting the same today to avoid getting sick. The same parts of the economy are under pressure ─ airlines, leisure, hospitality, restaurants, entertainment ─ consumer discretionary services in general.”
Since the current situation resembles the stock market correction in the early 2000s, let’s review what happened to home values during that time.The S&P dropped 45% between September 2000 and October 2002. Home prices, on the other hand, appreciated nicely at the same time. That stock market correction proved not to have any negative impact on home values.
If the current situation is more like the markets in the early 2000s versus the markets during the Great Recession, home values should be minimally affected, if at all.
More and more economists are predicting a recession is imminent as the result of the pullback in the economy caused by COVID-19. According to the National Bureau of Economic Research:
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Bill McBride, the founder of Calculated Risk, believes we are already in a recession:
“With the sudden economic stop, and with many states shutting down by closing down schools, bars and restaurants…my view is the US economy is now in a recession (started in March 2020), and GDP will decline sharply in Q2. The length of the recession will depend on the course of the pandemic.”
How deep will it go?
No one knows for sure. It depends on how long it takes to beat this virus. Goldman Sachs anticipates we will see a difficult first half of the year, but the economy will recover in the second half (see below):This aligns with the projection from Wells Fargo Investment Institute:
“Once the virus infection rate peaks, we expect a recovery to gain momentum into the final quarter of the year and especially into 2021.”
Again, no one knows for sure how long the pandemic will last. The hope is that it will resolve sometime over the next several months. Most agree that when it does, the economy will regain its strength quickly.
This virus is not only impacting the physical health of Americans, but also the financial health of the nation. The sooner we beat it, the sooner our lives will return to normal.
- The COVID-19 pandemic is causing an economic slowdown.
- The good news is, home values actually increased in 3 of the last 5 U.S. recessions and decreased by less than 2% in the 4th.
- All things considered, an economic slowdown does not equal a housing crisis, and this will not be a repeat of 2008.
With all of the havoc being caused by COVID-19, many are concerned we may see a new wave of foreclosures. Restaurants, airlines, hotels, and many other industries are furloughing workers or dramatically cutting their hours. Without a job, many homeowners are wondering how they’ll be able to afford their mortgage payments.
In spite of this, there are actually many reasons we won’t see a surge in the number of foreclosures like we did during the housing crash over ten years ago. Here are just a few of those reasons:
The Government Learned its Lesson the Last Time
During the previous housing crash, the government was slow to recognize the challenges homeowners were having and waited too long to grant relief. Today, action is being taken swiftly. Just this week:
- The Federal Housing Administration indicated it is enacting an “immediate foreclosure and eviction moratorium for single family homeowners with FHA-insured mortgages” for the next 60 days.
- The Federal Housing Finance Agency announced it is directing Fannie Mae and Freddie Mac to suspend foreclosures and evictions for “at least 60 days.”
Homeowners Learned their Lesson the Last Time
When the housing market was going strong in the early 2000s, homeowners gained a tremendous amount of equity in their homes. Many began to tap into that equity. Some started to use their homes as ATM machines to purchase luxury items like cars, jet-skis, and lavish vacations. When prices dipped, many found themselves in a negative equity situation (where the mortgage was greater than the value of their homes). Some just walked away, leaving the banks with no other option but to foreclose on their properties.
Today, the home equity situation in America is vastly different. From 2005-2007, homeowners cashed out $824 billion worth of home equity by refinancing. In the last three years, they cashed out only $232 billion, less than one-third of that amount. That has led to:
- 37% of homes in America having no mortgage at all
- Of the remaining 63%, more than 1 in 4 having over 50% equity
Even if prices dip (and most experts are not predicting that they will), most homeowners will still have vast amounts of value in their homes and will not walk away from that money.
There Will Be Help Available to Individuals and Small Businesses
The government is aware of the financial pain this virus has caused and will continue to cause. Yesterday, the Associated Press reported:
“In a memorandum, Treasury proposed two $250 billion cash infusions to individuals: A first set of checks issued starting April 6, with a second wave in mid-May. The amounts would depend on income and family size.”
The plan also recommends $300 billion for small businesses.
These are not going to be easy times. However, the lessons learned from the last crisis have Americans better prepared to weather the financial storm. For those who can’t, help is on the way.
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.