According to most economic experts, a recession is likely to occur in the next 12–24 months. 47% of those experts predict a recession in 2020.
If those words send you running toward your safe room, you’re not alone. After the losses many people took in 2008 and its aftermath, it’s understandable to fear the “R” word. However, a general recession does not necessarily mean the real estate markets or your home values will drop as precipitously as they did 10 years ago. The next recession is expected to be caused by something other than real estate.
With knowledge comes peace of mind. Put your mind at ease by understanding the likelihood, causes, and impacts of an upcoming recession on real estate markets. Here are five questions we can answer for you.
What is a Recession?
In economics, a recession is a period of temporary contraction within the business cycle. During this time, there is usually a widespread decline in economic activity, specifically related to spending, trade, and industrial activity. This decline can be shallow and somewhat prolonged. In the U.S., we define it as a fall in GDP over two consecutive quarters. When the downturn is sustained over a long period in one or more economies, we call it a depression.
Economic recessions can be triggered by a variety of economic events. Most often, they’re caused by financial crises, external trade shock, adverse supply shock, or the bursting of an economic bubble. During recessions, the government usually responds by increasing the supply of money or increasing government spending and decreasing taxation.
What Happens to Home Values during a Recession?
A recession does not automatically equal a housing crisis.
Typically, during bear stock markets (markets on the decline), investment dollars are diverted into real estate because of its long term stability. That stability means that recessions rarely cause home prices to go down. In fact, in three of the last five U.S. recessions, dating back to 1980, home values have increased.
The impact of the last recession is still fresh on the minds of many, even a decade later. However, it is very unlikely that the housing market will be as directly impacted by the next recession as it was by the last.
Why did the 2008 Recession Hit Home Values so Hard?
Real estate was heavily impacted in 2008 due to oversupply of homes for sale, paired with loose lending standards. People took out large mortgages on expensive homes and used an array of loan products to keep their payments low. This eventually lead to many households having little to no equity in their home.
The housing bubble peaked in early 2006 and we felt its burst well into 2012. The result of the burst was a central cause in the 2008 recession.
Since then, the Consumer Financial Protection Bureau has required greater transparency in loan estimates and the reach of certain loan products has been severely limited. Because of this, home buyers can now be more confident that the mortgage debt they take on is manageable for their budget.
What will Cause the Next Recession?
The top two triggers for the 2008 recession were the housing crisis brought on by depreciating home values and very loose underwriting standards. The next recession is very unlikely to duplicate the conditions we experienced in 2008. The projected triggers for the next recession are more likely to be trade policy, a geopolitical crisis, and/or a stock market correction.
Even though nearly half of economic experts are predicting a recession in the next year, none are predicting home values to fall. In fact, they are instead forecasting appreciation through 2020. Even with the economy slowing, there are simply not enough homes to sell, and with interest remaining low, demand remains high.
What does this Mean for You?
Real estate is most often purchased with a loan rather than cash. With interest rates holding at historical lows, your purchasing power is high despite the fact that prices have been increasing for a long stretch. In fact, it’s safe to say that homes are more affordable now than anytime since 2012.
Right now (in most price ranges), there is a shortage of homes available for purchase. And according to Corelogic, the average amount of home equity gained in North Carolina in 2018 was $8,000. That combination means more negotiating power for sellers. If you’re ready to move up to your dream home, it could be the best time for you to sell and make your move.
Ready to Learn More?
It can be hard to make sense of today’s complex real estate market and plan for your future. That’s why we create our WNC Real Estate Market Report each quarter. Contact your Beverly-Hanks real estate expert today for an in-depth discussion and your FREE Market Report.
All real estate is local. In order to make confident real estate decisions, we believe it is important for you to have timely and neighborhood-specific information. If you would like more information about the possibilities of an upcoming recession, our experts at Beverly-Hanks are here to help. Contact us today to speak with a Beverly-Hanks real estate agent about buying homes and land in Western North Carolina.