September Market Update

IS THERE A RECESSION COMING? WHAT WILL THE HOUSING MARKET LOOK LIKE?

by Jay Patel

The U.S. is on the brink of recession at just about any moment. However, the economy has remained steady over the last few years. The Great Recession began in December 2007 and ended in June 2009, but many Americans are still dealing with the effects, particularly from the housing market crash, years later with roughly 5.2 million homeowners owing more on their home than it’s worth at the end of the first quarter of 2019, according to ATTOM Data Solutions. While that number, representing 9.1% of all mortgaged properties in the U.S., is a slight increase from the end of 2018, when 8.8% of mortgaged homes were seriously underwater, it’s still far lower than anything seen in the aftermath of the recession. Negative equity hit its peak in 2012, when nearly 30% of homeowners were underwater on their mortgages.

Nationally, real estate has come a long way since those dark times. Home values continue to rise and are expected to increase a total of nearly 4.1% nationally in 2019, according to Zillow. Low inventory of available homes on the market and a high volume of buyers contribute to the price increases.

Since the economy is now flourishing and has been for a few years, people are wondering when it will begin to slow and are nervous about how badly they’ll be affected when the next downturn hits. Fortunately, the history of recessions and current issues that could harm the economy don’t lead many to believe the housing market crash will repeat itself in upcoming times.

While housing isn’t expected to be problematic nationally in the next recession, some markets will likely take bigger hits than others. Even outside of a large-scale recession, individual housing markets and geographic regions often see highs and lows, rising with demand and then experiencing a downturn once prices go beyond what home buyers are willing to pay.

Already, many markets across the U.S. have seen a slowing demand among buyers. This price correction makes up for recent years when housing inventory was so low it caused rapid home value increases. Rather than serving as a precursor to recession, these housing markets are preparing for a period when the economy tightens. But even if home values experience a dip on a national scale due to a slowing economy, a slight drop would not instantly lead to foreclosures. 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. Overall, homeowners aren’t making the same mistakes now and they have much more equity in their homes. In addition to this equity, the vast majority are also locked into 30-year fixed-rate mortgages, most likely having refinanced during the recent period of historically low interest rates.

With a low interest rate and affordable monthly payments, most homeowners are in a good place if the economy slows. If you haven’t refinanced yet, there’s still time to do so. The Federal Reserve announced in March that it plans to keep the federal funds rate at 2.5% for the remainder of 2019. The decision not to increase the rate, combined with a less competitive housing market overall, has helped keep mortgage rates low in recent months. Freddie Mac reported at the end of May that the average 30-year, fixed-rate mortgage interest rate fell to 3.99% at the end of May, which is the first time it has below 4% since January 2018. For many homeowners looking to lower their monthly payments with an economic downturn in mind, now would be a good time.