Is The Market Collapsing?
NO! We all have a vivant memory of 2006-2008 and the market collapse; arguably, the 2nd worst recession since the Great Depression. It's reasonable to have a little fear after what we witnessed. Most importantly, during that time, housing values plummeted. Some people just recovered to pre-2008 prices within the last 12-18 months and there are even a few areas that still have not recovered.
A recession, by definition, is a time where there are two straight quarters of an economic slow down. We use the word recession when describing the time period from December 2007 until June 2009 and we all think of that as the norm for a recession. In fact, that is far from the norm. As stated above, it is arguably the worst economic period since August 1929-March 1933 other wise known as The Great Depression. We, as consumers and regular people, do not always refer to the following as recessions:
March 2001-November 2001
July 1990-March 1991
July 1981-November 1982
January 1980-July 1980
November 1973-March 1975
Considering we are going back to the '70s, I'm not going to go further than our most recent 6 recessions. And part of the point of putting these dates out there is because there have probably been times between those dates that you were scared the economy was going to collapse. There have probably been times around those dates where media outlets used fear to sell. Regardless of your political beliefs, our last recession ended in 2009 and yet there were many times from 2008-2016 where we were told it's all going to come to an end and the recession was about to hit. Especially after days such as 8/8/2011 when the Dow Jones dropped 600+ points for one of the top 15 largest drops of all time.
By all accounts, not only are we not in a collapse based on definition, but most economists and our Fed Chariman believe we are in a relatively strong market and it will continue through 2019. In recent surveys done by Wall Street Journal and Pulsomics about when we will see a true economic slow down, the answers overwhelmingly have been 2020 to even 2021.
Why Is This Time Different From 2008?
None of us have a crystal ball, properly working Magic 8 ball or any other tricks, so we can only use data. First, let's look at the glaring difference and then we can analyze what it means. Depending on who you talk to, in 5 of the last 6 or some argue in 4 of the last 6 recessions, house prices WENT UP during the recession. 94 out of 100 leading economists believe housing values will go up whenever the next recession hits. 2 of 100 said it will stay the same or break even. The remaining 4 (4%) believe the values will decrease slightly. All 100 agree during a potential recession, over a 5 year period believe the real estate market will increase as a whole.
In a normal market, we see housing values increase by just a few percent (historical average is 3.6%). During the economic boom that has taken place and housing boom from 2013-2018, we have seen double digit percent increases year over year. Some homes have gone up over 100% in value in the past 5 years. That is far from normal and should never be expected.
From 2005-2007, Americans took out $824,000,000,000 (that's $824 Billion). And, as we know, many of them did so with mortgages that don't exist today as well as taking out 100% of the value of their home with cash out refinancing. In the past three years, Americans have taken out $172,000,000,000 ($172 Billion). Also, look into what people did with the cash they pulled out prior to 2008 and now. Many people are using cash from equity for businesses, home improvements and bad debt like high interest credit cards or student loans. In 2005-2007, many were using the equity for vacations, boats, cars, etc. Today, almost half the homes in America have 50% or more equity in their home.
Won't Higher Interest Rates Cause Doom?
Not exactly. Interest rates are still historically low. The Fed expects to raise rates 3 times in 2019. If we go back to the time frames for our last 6 recessions, interest rates were higher than they are or might be in 2019. More importantly, even leading in to the 2nd worst recession of all time - 2008 - interest rates were rising. Higher interest rates are not correlated to a housing market collapse.
So, What's Going On?
Quite honestly, it's been a perfect storm as 2018 has ended and we're entering 2019. We had a major inventory shortage. The shortage brought on a crazy seller's market that sold homes, even homes being remodeled or knocked down, to sell over asking price. The market allowed prices to rise, sellers to ask more for their homes and listing agents to place homes on the market at higher prices than previously believed. As more houses hit the market, there were rising interest rates. While there is no doubt interest rates don't cause recessions or housing dips, but they do pump a brake on house sales. We entered a new area, housing prices being higher than before and interest rates being higher than before. Of course, a buyer would take some time off from house shopping waiting to see what happens. It only makes sense to see if prices would stay the same, if interest rates would stay high, etc.
Because of the last quarter of 2018 being a bit of a leveling out, we have seen more price reductions than the past few years. We have seen more homes expire on the MLS and not sell. These homes were not indicative of a new market. They were indicative of a seller and agent misjudging the market. Rather than doing the research, understanding the market, knowing what may come in the next 3-6 months, and pricing appropriately, many just used the 3Ps of selling a home - Putting the home in the MLS, Putting a sign in the yard, and Praying the house sells. Many people got away from fundamentals of real estate sales.
We are already seeing buyers coming back out to find homes. During the exact time frame I'm explaining that more homes came off the MLS and more homes lowered prices, I watched homes sell in the opening weekend and sell with multiple offers. In fact, I had one myself that sold in 48 hours. There is indeed a new market compared to the old market. However, there is no foreseeable collapse!
Rent vs Buy?
There is/will be a separate post about this concept. However, if you can qualify to purchase, here is the simple breakdown to keep in mind. The landlord has factored the cost of the home and possibly mortgage, taxes and insurance on the home, potential repairs and profit when pricing your home to lease. The lease can also go up year over year depending on the contract you have signed. When you buy a home, your home price is set. Your principle and interest payment are set. And although your taxes and insurance may vary a bit year over year, this is also true and a factor of your rent payment. In short, the only reason you should be renting instead of buying is if you have a strong belief against home ownership or simply can not qualify. And please, please, please do not assume you can not qualify. Check out our multiple blog posts about pre-approvals to understand the value in talking to a mortgage professional and knowing whether you qualify or not and if it is worth house shopping or not.
As always, if you are thinking at all about buying, selling or investing in real estate. Please reach out to me. We can have a very casual meeting or a very structured meeting about your goals for 2019 and establish a plan. If not you, who do you know that is looking to buy, sell or invest in real estate? I'd love to talk!
(many stats come from Steve Harney at Keeping Current Matters)