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This is Not Your 2008

COVID-19 and the social distancing we’ve undertaken to stop its spread has had an impact on every industry and every facet of life. The stock market’s response to these events and the threat of a recession have caused many people to look back to the United States’ last recession, in 2008. But we find ourselves in completely different circumstances then we did then, especially when it comes to the housing market.

A Refresher on the Great Recession 

Let’s start with a quick refresher. Housing was the catalyst of the Great Recession. A perfect storm of factors had been building for years but came to a head largely in 2008. 

In the years leading up to 2008, almost anyone who wanted to purchase a home could. Lenders made access to mortgages incredibly easy and this occurred as home prices continued to rise and rise. Added to this was a surplus of inventory and a large number of homeowners tapping into their home’s equity. When all these factors came together to cause the housing bubble to finally burst, the mortgage backed securities hedge funds and banks had created, and the credit default swaps covering those mortgage backed securities, caused the crisis to ripple out from housing to banks and beyond. 

The Factors: 2008 and Now 

The main reason the housing market will not react to current circumstances the same way it did to 2008 is that none of the factors that caused 2008 are current issues. 

The current economic upheaval we’re seeing is based on external factors, not flaws in the system itself, which was the case in 2008. 

Access to Mortgages and Inventory Surplus 

Lenders learned their lesson after 2008, at least when it came to providing mortgages. Leading up to 2008, there was an excess of available properties, and lenders gave mortgages to just about anyone who wanted one. Since then, lenders have become far more strict about who they allow to take out mortgages. This is thanks to the Dodd-Frank Act, passed in 2010 in response to the events of 2008. The Dodd-Frank Act requires lenders to make a good faith effort to determine if a consumer can repay a loan, increases the amount of information lenders must disclose, and updated escrow requirements. 

Property Values 

Trends in property values obviously vary depending on the location in question, but in 2008 we saw a massive increase in property values almost across the board. This is the defining characteristic of a bubble – prices balloon upward before crashing back down to Earth. While certain markets may be seeing higher appreciation, the average annual rate of property value appreciation in 2019 actually dropped. This means that though property values continue to increase, the growth is nothing like the rapid increase that creates a bubble. 

Tapping into Home Equity 

Household debt is currently at a historical low compared to GDP and saving is up. While this doesn’t mean that every household is secure, as a whole, consumers are in a far better place than they were in 2008, when credit was at a record high. Less debt also explains the increased rate of saving, compared to 2007, when the average American household saved only 3.6% of total income.

Getting Back to “Normal” 

Though there is no lack of speculation, there’s currently not enough data to know how long COVID-19 will continue to have a social and economic impact. That being said, the economic impact is being caused by a specific event. It is this event, not the financial or housing industry itself that is creating the economic and financial impact. 

This means that once social distancing is no longer required, life will more or less go back to normal. In contrast, the events of 2008 led to a financial meltdown, because the issue was not one specific event, but the way in which the financial and housing sector had functioned. This led to the inability of the economy to get back to “normal” for years. 

Home Values and Recessions 

We have not yet entered a recession, but it looks likely that we soon will. Even if there is a recession, it’s likely to be shorter and less severe than the Great Recession, but that isn’t stopping many people from becoming concerned about how a recession will affect home values. 

Since home values dropped significantly during the last recession, many people may associate recessions with depreciating home values. While this makes sense, especially since many adults’ only experience with a recession may have been the 2008 recession, this is simply not the case. 

In the last forty years there have been five recessions, and three of those recessions saw home values appreciate. And while the drop in housing prices in 2008 was dramatic, the only other recession in the last forty years to see home values depreciate, saw an average depreciation of less than two percent. This is all to say that though we will likely enter a recession, that does not mean that housing prices will depreciate. And even if home values were to depreciate, it’s far more likely they would drop one or two percentage points than they would to have the dramatic depreciation of the Great Recession. 

How COVID-19 Is Impacting Real Estate 

While the impact to housing looks almost nothing like it did in 2008, there are a few ways COVID-19 is impacting housing, including ways that may actually benefit investors. 

One of the biggest impacts to the housing market is the dropping mortgage interest rates, which may be a chance for some homeowners to refinance. 

But closing on new or existing deals may pose a challenge for many investors, due largely to travel restrictions and social distancing requirements. Furthermore, the uncertainty and the requirements to shelter in place may mean a temporary decrease in transactions. This is certainly the case in Birmingham, where week over week data show that as of April eighth of this year there were 219 closing, while there were 423 closings for the same week in 2019. 

The Takeaway 

The current state of the housing market looks nothing like it did 12 years ago. In fact, less competition, lower interest rates, seller uncertainty, and more opportunities may actually make this an ideal time for real estate investments. Furthermore, housing can offset downturns in other areas of the market and create a more diverse and less volatile portfolio. 

What’s right for you will depend on your financial circumstances, goals, and personality. The key is to base your investment decisions on facts, not emotions. 

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