The National Bureau of Economic Research (NBER) announced that the U.S. economy officially entered a recession in February 2020. According to the NBER, “A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”
The February 2020 peak marks the end of an expansion that began in June 2009, an expansion that ran for 128 months. It is the longest expansion in the history of U.S. business cycles dating back to 1854. The previous record was 120 months from March 1991 to March 2001.
In general, most adults realize the pandemic caused the economic decline that basically shut down the United States. But does a recession mean there will be a housing crash?
What Does It Mean for the Housing Market?
Mark Fleming, Chief Economist for First American Financial Corporation, a leading provider of title insurance, settlement services, and risk solutions for real estate transactions says, “The housing market is not immune to its impact but may be in a better position than many believe.”
Fleming explains, “While mortgage rates have fallen due to the economic uncertainty, potential home buyers that are confined to their homes cannot necessarily take advantage of the affordability boost.”
While many homeowners may expect the housing market to respond to the coronavirus outbreak as it did in the 2009 Great Recession, there are distinct differences that indicate the housing market may follow a much different path. Fleming says, “While housing led the recession in 2008-2009, this time it may bring us out of it.”
What Is Different Today?
There are several differences between the housing market prior to the Great Recession and the housing market at the beginning of 2020. Fleming finds three differences between the previous Great Recession and the housing market now:
- First, the housing market is not overvalued. The only time period in recent history when the median home sale price was greater than house-buying power was from 2005 through 2007. That difference indicated an overvaluation of housing or a housing bubble. In 2020, house-buying power is nearly twice as high as the median sale price of a home, implying that housing is not overvalued. This buying power puts housing in a much better position entering this recession than before the 2009 Great Recession.
- The housing market is underbuilt. Housing enters this potential recession underbuilt rather than overbuilt, very different from the pre-Great Recession housing market. Before 2009, the housing supply significantly outpaced demand.
- Equity is at historic highs. Today’s housing market is not driven by liberal lending standards, sub-prime mortgages, or highly leveraged homeowners. The Federal Reserve shows the current household debt-to-income ratio is at a four-decade low. The Great Recession’s housing crisis was fueled heavily by homeowners who had little, if any, equity in their homes. Today, homeowners have very high levels of available home equity.
Although it is counter-intuitive, recessions do not necessarily mean a crash of the housing market. Leading real estate data provider ATTOM Data Solutions, according to Curbed.com, found that only twice during the five recessions since 1980 (1990 and 2008) home prices came down. In 1990 the decline was less than a percent. In 2008 home prices declined by only 1.9%. During the other three recessions, prices actually went up.
Although the country is in an official recession, unlike 2008, this time the housing industry is in much better shape to weather the current storm.
- Determination of the February 2020 Peak in US Economic Activity (National Bureau of Economic Research)
- Why the Housing Market May Weather Coronavirus Impact Better Than the Great Recession (First American)
- How a Recession Could Impact the Housing Market (Curbed)