The last recession was caused in part by a downturn in the housing market
It’s unclear when the next recession will come. But a recent report argues that when it does the U.S. housing market is unlikely to adversely affected in any major way.
Researchers at First American Financial Services FAF, -1.28%, a title insurance company, examined how the country’s housing market has fared historically during recessionary periods. Based on what’s happened in past recessions, the report argues that the next recession is unlikely to prompt a major downturn in housing.
“While the housing crisis is still fresh on the minds of many, and was the catalyst of the Great Recession, the U.S. housing market has weathered all other recessions since 1980,” wrote Odeta Kushi, deputy chief economist at First American and the report’s author. “In fact, the housing market may actually aid the economy in recovering from the next recession — a role it has traditionally played in previous economic recoveries.”
Using its own data along with information from Freddie Mac FMCC, -0.47% and the National Association of Realtors, the report maps out how the housing market has traditionally fared in economic downturns. In most other cases, home price appreciation continued at an even pace, and existing-home sales growth only edged downward slightly, Kushi wrote.
So what made the Great Recession different? The housing boom that preceded the last recession was largely driven by an explosion in both home-building activity and mortgage credit. Home buyers were able to get mortgages with no documentation of their income and no down payment, and many loans had introductory 0% interest periods that made them cheap to start but more expensive as time wore on.
These homeowners were over-leveraged. “The housing crisis in the Great Recession was fueled heavily by the fact that job loss was paired with a significant share of homeowners who didn’t have much equity in their homes,” Kushi wrote.
And because developers constructed so many homes, their home values quickly sank when the bubble burst, exacerbating the situation further.
The growth in home prices seen during the current economic expansion has not been fueled by increased access to mortgage credit. Rather, it’s a simple reflection of supply and demand: Many Americans want to become homeowners, but the supply of homes available for sale is very low, pushing prices upward.
While this has made the prospect of buying a home unaffordable for millions of Americans, it has also meant that those who are homeowners have seen their home equity grow substantially in recent years. That decreases the likelihood that they would be underwater on their loan if home prices were to dip in a recession.
“Were we to have a recession, I’d argue housing would provide a cushion because the shortage of supply at the entry-level suggests builders could actually continue to build,” Doug Duncan, Fannie Mae’s chief economist FNMA, +0.07%, told MarketWatch in December.
There still are red flags that homeowners should be on the lookout for when it comes to how a potential recession might affect the housing market. For starters, many Americans have taken out cash-out refinance mortgages on their homes as their home values have grown. That’s whittled away the equity these people have in their property, leaving them more vulnerable to owing more than their home was worth in the potential event the home prices drop.
Another issue: Many Americans who fell behind on loan payments and modified their mortgages in the wake of the recession to avoid foreclosure have since redefaulted. Were these people to lose their jobs in a recession, they could easily fall into foreclosure. Research has shown that foreclosures exacerbate economic downturns — and they can have a ripple effect through a local market, causing other homes to drop in value.
And at the local level, certain local housing markets could prove more resilient in the event of recession, depending on the strength of the local economy relative to what’s going on at a national level.
Business3 years ago
Tesla’s surge inspires fans to buy, skeptics to dig in, drives fear of missing out
Advertorial3 years ago
Legendary Stock-Picker Predicts Best-Performing Stock of 2020
Business5 years ago
Everything you need to know about mining
Personal Finance3 years ago
The Highest Paying Cash Back Card Has Hit The Market
Advertorial3 years ago
60x better than Tesla Batteries
Markets3 years ago
Say Goodbye: The Stores & Branches Closing by 2020
Taxes3 years ago
The 10 Most Tax-Friendly States in the U.S.
Markets3 years ago
Get $50k In Life Insurance Regardless Of Age