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Thursday, January 19, 2023

Why This Housing Recession Won’t Be Like the Great Recession

Housing Recession Bounce Back

Why This Housing Recession Won’t Be Like the Great Recession

History might not always repeat, but sometimes it can rhyme. For those investors who came of age before the housing crisis of 2007-2008, any dip in housing prices or home buyer confidence can start to feel like a verse coming around again.

According to a new housing report, an alarming price dip is setting off some alarm bells. Notes from the report found “pending US home sales dropped 32% year over year to their lowest level since at least 2015 during the four weeks ending January 1.” In other words, the start of 2023 is showing a significant decline in how many people are putting their houses on the market. Recent rises in mortgage interest rates, particularly throughout 2022, aren’t likely helping. Typically, a drop in supply signals a decline in housing prices. That could be tough news for homeowners and sellers.

This is all happening against the backdrop of high inflation and consistent warnings of a recession.

But does this news mean a potential housing recession that will look like what came before? Or is the Great Recession going to hold onto its name? We did some research to explore the latest news—and how it looks in the context of the housing crisis from 2008.

Property Values Dropping: What Does It Mean?

Property price drop

There are reasons for the new worries. As MSN notes, “the housing market looks far different today than it did even six months ago.” It pointed out that one source of real estate data, tracking 900 US cities in approximation, saw 81 of those cities decrease in home prices in the third quarter of 2022, which was the most recent available data.

That might sound like a small percentage, but real estate doesn’t drop very often—traditionally, stock markets are much more wobbly than real estate, which rarely see steep declines. Real estate is often the tortoise to the stock market’s hare, taking longer to move in either direction.

That’s why the recent headlines have attracted the attention of people looking for the next housing recession. As the CEO of Lloyds Bank, Charlie Nunn, recently pointed out, housing prices in the UK could also be looking at a year of decline, a sign of what might come in the United States.

Typically, property values dropping this much says a lot about supply and demand in the housing market. As data suggests, the problem seems to be with supply. Homeowners aren’t interested in moving, likely thanks to higher mortgage rates in 2023, which means more people are standing by their current homes. That creates less real estate supply for buyers, who are already looking at challenging mortgage rates as a potential obstacle.

“Between soaring prices and rising rates, the typical home buyer in October paid 77 percent more on their loan, per month, than they would have last year,” The New York Times (NYT) noted last year. “With a national median asking price of $425,000 and a 10 percent down payment, that works out to an additional $1,117 every month.”

It’s no wonder housing prices have been falling in the past months, with similar momentum moving into 2023.

How Does This Compare to the 2000s?

Comparison Chart

The New York Times suggested the housing market is worse than experts think, predicting “buyers, sellers, and renters are in for more twists and turns, as soaring mortgage rates and stubborn inflation signal belt-tightening ahead.”

While that article pointed to the bad news in US housing, it also pointed out some differences between the housing crisis in the 2000s and what we’re looking at now.

The key difference, notes NYT, is analysts don’t expect home prices to free fall as they did after the subprime mortgage crisis in 2008. That’s for a multitude of reasons:

  • Revamped underwriting regulations. Stricter underwriting practices mean that there aren’t the reckless, low-restriction loans that defined the housing crisis for many. This means that tighter regulations are keeping mortgage loan policies in check. During the housing crisis, for example, it was common for home loans to be made without any income or job verification.
  • Higher home price appreciation. Higher home prices can still mean that some people are willing to sell, which keeps the supply a little more liquid than it might otherwise be.
  • More investors with cash on the sidelines. The New York Times calls this a “class of all-cash investors waiting to swoop in when prices dip,” adding stability to the housing market.

That isn’t to say that home prices are destined to stay high. However, analysts see that there may be some reasons why the situation in 2023 isn’t quite what it was in 2007. Any problems that arise in housing may come from other areas, such as fewer buyers on the market, thanks to high interest rates.

Why the Housing Recession Might Not Be the Same

Housing Recession

Many analysts expect a recession in 2023, typically defined as two quarters of negative growth in GDP. But it’s important to remember that recessions look at the economy from a more “bird’s-eye” perspective. A housing recession may be a more generalized term that simply means lower prices.

There’s no telling what’s coming down the economic pike, of course, but a drop in housing prices doesn’t have to usher in a financial crisis like the last great housing recession in 2007-2008 brought. Those years saw financial instability exacerbated by issues like poor mortgage lending policies, many of which are not in place today. The banks, in turn, may be less “exposed” to the dangers of a housing market that decreases in price.

While “something big” may be cooking up in the housing market, that doesn’t mean what’s coming in 2023 will look the same as in 2007. But no matter what’s coming down the line, reports are cautious. Even without a crystal ball, homeowners have some warning to anticipate lower housing prices.

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Preston Guyton

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