As recession fears mount, I wanted to share some information on why home prices are predicted to stay level (from MarketWatch). The last, “great recession” of 2008 was fueled by a series of events happening in sequence that in hindsight were avoidable:
- An explosion in both home-building activity and mortgage credit to home buyers with no income documentation or down payment + 0% introductory loans that allowed them to be over-leveraged.
- Add to that rampant unemployment.
- Very little home equity as it had been leveraged through home equity loans (often to purchase rental properties).
- An unexpected downturn in the housing market as it was flooded with “upside down” rental properties.
- A foreclosure crisis that could not be absorbed by the market, banking institutions, or loan service companies.
With this combination of events you begin to understand how this period of economic downward spiral was fueled by the perfect storm. Unlike the 2008 recession, the current housing market today is not driven by homeowners who are highly leveraged. In fact, the household debt-to-income ratio is at a four-decade low.
Since 1980, the U.S. Housing market has weathered all other recessions. Deputy Chief Economist Odeta Kushi with First America in a recent report is quoted as saying, “In 2020, we argue the housing market is more likely poised to help stave off recession than fall victim to it.” Kushi goes onto share, “With the exception of the Great Recession, house price appreciation hardly skipped a beat and year-over-year existing-home sales growth barely declined in all the other previous recessions in the last 40 years.“
The recent growth in home prices is fueled by: Supply & Demand. While this is making the possibility of homeownership unaffordable for millions of Americans, it also means that countless more homeowners have seen their home equity grow substantially in recent years. This equity decreases the likelihood that they will be underwater on their loan if home prices were to dip and thus serves as a shelter during a downturn.
In terms of the corona virus’ effect on the housing market, Mark Fleming, Chief Economist of First America, states, “This time, housing is a casualty of a public health crisis turned economic, not the cause of an economic crisis.” In his recent post, he charts the differences between the pre-Great Recession housing market and the one at the cusp of the coronavirus outbreak.
“Today, house-buying power is nearly twice as high as the median sale price of home, implying that housing is not overvalued, and is in fact in a much better position entering this potential recession than it was ahead of the last,” continues Fleming.
But homeowners should stay alert for potential red flags! Be cautious of scenarios where:
- A significant number of homeowners begin to take cash-out or home equity loans that will result in a whittling away of their equity and this “safety net” against economic downturn.
- A ripple effect of foreclosures in our region which would cause your home to drop in value.
THERE’S REASON TO BE ENCOURAGED:
- There continues to be a shortage of inventory in the Sacramento & Roseville, California real estate market, so if you’re a seller…this an excellent opportunity.
- If you were thinking of down-sizing this is the time to take advantage of your equity!
- If you’re a Buyer – Interest-rates are historically low so your affordability equation gets a boost.
- For first-time home buyers, there are low interest loans and down-payment assistance programs available to help.
“Many expect the housing market to follow a similar trajectory in response to the corona virus outbreak. But, there are distinct differences that indicate the housing market may follow a much different path. While housing led the recession in 2008-2009, this time it may be poised to bring us out of it, ”
Mark Fleming, Chief Economist of First America
Beyond what it is, should you use it in your offer to purchase a home? As a REALTOR representing a Buyer, we can get pretty excited about the opportunity to utilize this tactic. Also known as a “Sharp Bid”, an escalation clause is used in the circumstance where multiple offers are highly likely. This likelihood is usually generated when you see a Listing that states something to the effect of, “All offers to be reviewed on Monday at 5pm” or the property has been priced below market. The intent of this competitive bidding strategy is usurp all other offers by offering a $dollar amount (usually $100 to $1000) above the next highest offer received by the Listing Agent with a cap “not to exceed $dollar amount.” I usually recommend that we request proof of the highest bid.
If you’d like to learn more, please don’t hesitate to reach out.