Economists are not clear on when the next recession will happen. However there are some major differences that exist that differentiate this real estate market from the one in 2008. These differences indicate that the upcoming economic slowdown will not be caused by a housing market crash. There are those who will compare today’s real estate market to the market in 2005-2006, which preceded the crash. Here are three points that have caused this concern, and why they don’t hold up.
In 2006 there was a surge in the gap between home prices and household income. At that point, a lack of affordability created a crisis and people stayed in place not buying houses. Today, home values have also outpaced wage gains. This eventually will cause the same crisis.
The “gap” between wages and home price growth has remained since 2012 and yet to this point it has not caused a recession. This may be because a buyer’s purchasing power is MUCH GREATER today than it was thirteen years ago. The equation to determine affordability has three elements: home prices, wages, AND MORTGAGE INTEREST RATES. Today, the mortgage rate is about 3.5% versus 6.41% in 2006.
In 2018, as in 2005, housing-price growth began slowing, with significant price drops occurring in some major markets. Look at Manhattan where home prices are in a “near free-fall.”
The only major market showing true depreciation is in the city of Seattle, and it looks like home values in that city are about to reverse and start appreciating again. CoreLogic is projecting home price appreciation to reaccelerate across the country over the next twelve months.
Specifically in Manhattan, home prices are falling due to the city’s new “mansion tax” is causing a dip in demand. Also, the new federal tax code, in effect as of last year continues to impact the market, capping deductions for state and local taxes, known as SALT, at $10,000. That had the effect of making it more expensive to own homes in states like New York.
Prices will crash because that is what happened during the last recession.
Yes, home values sank by almost 20% during the 2008 recession. Yet, it is also true that in the four previous recessions, home values depreciated only once (by less than 2%). In the other three, residential real estate values increased by 3.5%, 6.1%, and 6.6%.
Price is determined by supply and demand. In 2008, there was an oversupply of houses (a 9-month supply). Today, housing inventory is less than half of that (a 4-month supply).
There are some critical factors that differentiate between the real estate market now and the 2008 real estate market. The gap between wages and home costs has decreased since 2008 with mortgage rates reducing as much as 3 percent. The availability of homes is significantly reduced creating a higher demand for the houses that are on the market. In 2008 there was an oversupply of houses sitting on the market currently there is a shortage of options for homebuyers across the country. While the economy is cyclical, History shows us that housing doesn't always crash during a recession.