Markets have declined sharply in recent weeks thanks to the global coronavirus outbreak but even with the specter of a recession mounting, homeowners may not need to worry much about their home values falling in line with the stock market, a recent report argues.
While the housing crisis is still fresh, the housing market may actually aid the economy in recovering from the next recession — a role it has traditionally played in previous economic recoveries.
The coronavirus pandemic is acting as a catalyst to a real estate market downturn; however, the underpinnings have been present for years. While no one can truly predict market cycles, historically speaking, roughly every 10 years we head into a recession phase. It’s now been over 12 years since the Great Recession, which lasted a staggering 18 months (the longest since the 1929 Great Depression) and was caused by a subprime mortgage crisis — banks bundling these mortgages together and selling them off as mortgage backed securities. This, however, is different. It’s truly unlike anything many of us — or perhaps the world — has ever seen. The causal factor is not related to our real estate system, or gross negligence as it relates to big banks, etc. Looking back to the Great Recession, it was more than a year until the collapse of big banks (for example, Lehman Brothers). Similarly, with the Great Recession, it took over two years to see roughly 50% of the stock market wiped out. In this instance, a severe impact on the stock market took less than one month and was truly unprecedented.
Beyond the fact that the stock market sell-off is the highest any of us will most likely ever see in our lifetimes, home sellers are pulling out of the market at increasing rates as well. It's important to note that there isn’t always a correlation between a recession and a housing crisis, even though many of us who have lived through the previous Great Recession assume that today's real estate market is going to hit rock bottom in a congruent fashion.
Keep in mind that the housing market is strong and resilient. Everyone needs a place to live, and in previous recessions (other than that of 2008), housing prices have actually increased or remained steady. I predict the current climate could lead to a significant drop in real estate values in the short term, at least in markets that are overly inflated (South Florida and Las Vegas, for example). However, when the market has low inventory (as caused thus far by the current crisis, with many sellers taking their properties off the market) combined with low interest rates, it still seems to be a highly competitive market, which should keep prices relatively stable once the threat of the virus passes.
The flip side to this is lenders are financially strained by waiving mortgage payments, and this could translate to fewer loans being made to prospective home buyers in the future, which could send prices lower. Regardless, instead of fearing this market or what may transpire in the near future, this is a good time to acquire property. Mortgage rates are unbelievably low, and in the short term, there will certainly be deals in your local market. Consider putting in offers on investment properties 10-25% under list price. Many sellers are willing to negotiate with buyers and are eager to unload their inventory. Putting in offers during this period is certainly not a sure thing and carries an intrinsic risk, but in the long run, you'll more than likely do well.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.