In this post, we’re going to dive into a topic that we’ll probably be talking about for a while. Will a recession happen? Now, there are signs that one will probably occur. But how will home prices respond?
To give us a sense of this, let’s take a look at the Median Sales Prices of Houses sold in the U.S. over the last 45 years.
The chart below is from the St. Louis Fed. The gray columns indicate recessions, and that really skinny one on the far right was the recession during COVID. Now, every local market is a bit different when it comes to sale prices, but this national data will give you insight into the overall price that houses sold for during the recessions. What you’ll see is that home prices didn’t really drop too much during recessions until 2008. Generally, pushing through recessions, home prices remained on an upward trend.
That’s the big question for this post. It’s a complicated topic, but from a bird’s eye view of things 2008 was heavily impacted by:
The inventory of homes available. In 2008, the inventory of homes was near an all-time high. Today, as we all know, you can't even find a house for sale. Right now, inventories are low.
Big rental properties. At the end of 2008, we had high vacancies (about 10% in rental properties). Today, we’re at about 5.5%. So, we’re almost at half the number of vacancies in rental properties. Again, inventory is low.
Rent prices. Right now we have a low inventory of homes for sale and we have very few homes that are actually available for rent. Because of this, we have high rent prices. Back in 2008, rent prices were not as high.
Interest rates. Interest rates are much lower now than they were back in 2008. Back in 2008, the interest rate for the average 30-year-fixed was ~6.3%. Now, that number is ~3%.
Underwriting standards. Today, underwriting standards are much higher than they were in 2008. This is, in part, due to corrections that were put in place to prevent 2008 from happening ever again. That said, debt ratios are, currently, still allowed to go pretty high — up to 50% of one’s income. Because underwriting standards have increased, properties are less likely to go into default.
Corporations owning homes. In 2008, corporations owned fewer homes than they do now. Today, there are lots of corporations that are buying up single-family residences. You've probably been hearing about them with all these cash offers out there coming in from LLCs or subsidiaries or companies like BlackRock. These corporations are buying up inventory and builders who are typically adding new homes to the inventory. However, as a result, we’re not likely going to get any inventory from these builders. We’re going to get less.
Right now, underwriting standards are very high and currently people have very low interest rates.
What could cause Home Prices to decline? A fall in home price values will require a large number of homes to be put on the market for sale. It’s just that simple, i.e., we need a lot more homes for sale. We need sellers to compete for buyers. As long as sellers don’t have to compete for buyers, we won’t see home prices decline. So we need to ask, what could cause people to list their home for sale? I’ll attempt to propose a way we could get there. Here are 2 possible steps that may cause a wave of listings to hit the market;
Step 1 - IF Stock Market Crashes and corporations and business start laying off large (would need to be historic) numbers of employees. The layoffs need to be significant
Step 2 - IF unemployment numbers start climbing causing people to lose their jobs and/or take large pay cuts, people won’t be able to afford their lifestyle and debt. If this happened, they may need to tap into the equity in their home (by selling it) and then settle for paying rent even if the rent payments are higher than their low interest rate mortgage payment.
So, with all the above given, will home prices fall if we have a recession? Now, it’s impossible to predict what exactly will happen, but our opinion is that it seems more probable that home prices will not fall in the next recession. The circumstances between now and in 2008 are just too different. I just don’t see a large number of homeowners rushing to list their homes for sale and trade in their low interest rates and payments for the alternative (high rent). It just wouldn’t make a whole lot of sense to do that and therefore we think it’s unlikely that housing prices will fall even if we have a recession coming.
We hope this has helped orient you with where things stand. Now, the last part of this is a warning: please do not listen to the clickbait headlines. Make sure you look for the data and do the research from reliable and reputable sources.
If you have any questions that you’d like us to answer, you can email your questions to team@AZmortgagebrothers.com. Be sure to ask us for a free quote on your next mortgage. We'll be sure to give you personalized service and help you through the whole process.
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