Because today’s real estate market is completely different from the 2008 market, when an economic slowdown happens it will be completely different from the last one.
Though we don’t know when the next recession will occur, we can confidently surmise that the next economic slowdown will not be caused by a housing market crash, like in 2008. Although there is some disagreement with this supposition, the market is very different than the market leading up to the 2008 crash. Here are the main suppositions being put forward by some, and why they aren’t exactly correct:
SUPPOSITION #1
Last time a critical warning sign was the gap between the growth in home prices and household income. Currently, the home values are also outpacing wage gains and, as in 2006, the lack of affordability will be detrimental to the market.
Counterpoint
Since 2012 there has been a gap between wages and home price growth. If this is a sign of a recession, shouldn’t we have had a recession in the last seven years? Also, a buyer’s purchasing power is greater now than thirteen years ago. The equation to determine affordability has three pieces: home prices, wages, and mortgage interest rates. Currently, rates are around 3.5% versus 6.41% in 2006.
SUPPOSITION #2
House price grow slowed in 2018, as in 2005, with some major price drops in major markets. In Manhattan prices are close to free falling.
Counterpoint
Seattle is really the only big market showing actual depreciation. There it actually looks like home values are about to reverse and start appreciating again. Over the next twelve months, CoreLogic is predicting home prices will begin to reaccelerate across the country.
As for Manhattan, the city’s new “mansion tax” is draining demand and home prices are dropping as a result. Also, the new federal tax code is continually impacting the market by making home ownership more expensive in states like New York.
SUPPOSITION #3
Prices will crash because that is what happened before.
Counterpoint
While home values did drop by almost 20% during the 2008 recession, it is also true that in the previous four recessions home values only depreciated once (by less than 2%). Residential real estate values actually increased by 3.5%, 6.1%, and 6.6% in the other three recessions.
Home prices are determined by supply and demand. In 2008, there were too many houses available (a 9-month supply). Now, there is only about a 4-month supply.
Key Point
It is important to understand that today’s real estate market is not like the 2008 market. Because of this, when a recession occurs, it will be different than the last one.
