Is it safe to wait for a recession before investing in real estate? It may feel that way at times, especially these days, but most of the time if we decide against investing in a real estate asset, we regretfully watch the price of rents and equity rise right before our eyes. Speculation can lead us to fear that the housing market is due for a recession, and it can drive us away from investing. Therefore, it’s helpful to look at all the precursors in 2008, and look for the same indicators in today’s market. It really does come down to a case of simple economics with supply and demand.
Recession of 2008– the demand was low, and the supply was high
We had a twelve month supply of houses on the market, and soon after the supply got so big, we quickly had a flood of foreclosures. The foreclosures were mostly due to adjustable rate mortgages, and the banks making it hard to get a loan or refinance. The builders just kept building, even with the flood of homes already being on the market. The first time home buyer loans were around 40% of houses being bought in 2006 and 2007, which indicate first homes and younger buyers at the time. All of these things accumulated over time, and pushed the housing economy into recession.
Current housing market– the demand is high, and the supply is still low
This housing market looks completely different from 2008, even though a glance at the media, it can certainly feel the same because it’s all doom and gloom. This market has about a 1.5 month supply of housing available, and the builders haven’t been building for the past decade, so they are trying to catch up, while also dealing with a supply chain disruption. First time home buyers’ loans are down to only 26% of the market, indicating that most home sales are in the move-up market (possibly using their equity to move up to a bigger house). The demographics show that millennials are the biggest generation in U.S. history (29-32 year olds), and the typical first time home buyer’s age is now 33. Interest rates, even though rising, are still lower than 2008. Rental prices are going up just as fast as home prices are, and delinquency rates on mortgages and unemployment are all low.
None of the predictors seem to be in place for us to be headed for a housing bubble. Although, it is more likely that we are in a recession now and don’t know it, than a recession coming in the near future. The market has slightly softened because of rising interest rates, but the demand is still high. Several months ago there may have been ten offers on a single house, with 10-15% over-asking prices being offered. Since the increase of interest rates, even if that eliminates half of the home buyers, we are still looking at five to six offers on a single house. That’s not even touching on the rental market, which is also still at an all-time high.
A market correction, or normalization is possible, a housing crash is very doubtful. Although, many times it’s hard to know you’re in a bubble, until the bubble bursts. It feels like a recession could be coming because of inflation, and the FED raising interest rates so aggressively, but the symptoms of the last recession are very different from today’s market.
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