What Would a Recession Mean for Housing?
The “R” Word
It’s come up a lot recently. With unemployment at or near all time lows, a stock market rally that’s defied all odds for longer than history says it should have, and the Fed looking at potentially reversing monetary policy, it looks like our next recession is more a matter of when, not if. With the most recent recession being the “Great Recession” that caused so many people to lose their homes, retirements, and so much more, many people are understandably frightened by the prospect of another recession. In some cases, that fear is well founded. Housing, though, isn’t an area that appears particularly vulnerable.
One thing many people remember from the last recession is how quickly and how far home values fell. “For Sale” signs littering neighborhoods, short sales, and foreclosures are still fresh in the minds of many, but if we look at the data, this time is different. And while many aspects of what causes a recession are complicated, and global economics isn’t always easy to understand, one major factor in housing is very easy to comprehend – the idea of supply and demand.
Supply and demand laws state that when there’s a high supply, and not enough demand, prices go down. And when there’s high demand and low supply, prices go up. Well, let’s look at supply and demand in terms of housing, first with supply:
Supply is below demand levels in the current housing market
As you can see, current supply levels are far below where they were in 2008, when values began to crash. But what about demand? Well, let’s take a look at one of the biggest drivers of demand – household formations:
Housing completions aren’t keeping up with household formations – a good sign for home values
Household formations are a strong indicator of demand for housing, and as you can see in this graphic, annual home completions aren’t keeping up with household formations (due to many factors), and if you look back to the last recession, you can see the opposite was true – the supply of homes far outweighed the formation of households to fill those homes up.
The chicken or the egg?
BUT, you may say, you can’t escape the fact that there was a recession, and that during that recession, home values fell substantially! And you’d be correct – but which came first. If you look at the data, the housing bubble started to collapse, and actually caused the recession. It was a housing bubble that caused a recession, and not a recession that caused problems with home values. Today’s market IS different – we have a high demand for housing, and not a lot of supply, which means even in a recession, home values should be in relatively good shape (as they have been historically through recessions).
2008-2012 was a bubble collapsing, there’s no doubt. But those who think the market today is similar aren’t looking at data. The data suggests that home values will continue to hold strong, and forecasts are calling for home appreciation to continue. Historically, buying a home has been one of the biggest pieces to the puzzle of wealth building, and today that still rings true. Want proof? Ask a MasonMac loan officer to share data with you on your local market. Real estate is local, but in the majority of markets, you’ll see supply is lagging behind demand, and buying is a smarter financial move than renting, especially long term, but in some cases, short term as well.
Recessions aren’t fun. They cause problems for a lot of families, industries, and communities. While we don’t want to diminish the fact that people could see some financial struggles, we do want to make it clear that yes, in fact, this time is different. While the Great Recession crushed housing, going forward, housing looks to be one of the strongest areas of our country’s economy, and it doesn’t look like that trend will be ending any time soon.
