Real Estate Bubble Burst and Recession Repeat?

A Recession is Likely Ahead of Us, but not Due to Real Estate Home Sales

In 2006 and 2007, home sales were reaching “an unprecedented pricing level” in home prices. Houses were selling for prices that seemed unrealistic and unsustainable. Sounds familiar, right? The 2019-2022 real estate market has home sales at the highest levels ever. The difference between this period and the 2006-2007 boils down to three key factors.

Mortgage Regulations, Borrower Strength and Inventory

Most buyers do not recall the mortgage practice prior to 2009. Before 2009, the mortgage industry was not heavily regulated. Real estate home sales had a process, but it lacked oversight. This is why “predatory lending” came to be. Added to the lack of oversight and aggressive lending sales efforts, the appraisal process was also unregulated and many were done in-house to the lender of record. Today, strict laws govern lending on real estate home sales. And the appraisal community is now managed by a few national management companies that oversee appraisal activities and reporting.

Borrower’s (home buyers) made the mortgage lending practice even worse. Buyers were pursuing houses that were simply beyond their means. Cost of owning and maintaining a house was never discussed or factored into the purchase. Lenders were giving excessive loans to buyers with low credit scores. Buyers in the 2006 period averaged a credit score of less than 600 points. Whereas in 2022, the average credit score of a buyer is over 650, with most being over 700.

Home sales are as strong as ever largely due to the lack of available homes to be purchased. Coupled with the intense rise in rental costs and the strength of home buyer’s borrowing capability – the demand for home ownership has never been stronger. On average, home builders kept a pace of roughly 2 million homes built per year leading up to 2008. In 2009, it plummeted. And, in 2022, the expected annual building is only 1.77 million. Over the course of 2010-2020, the number of homes built was less than half compared to prior periods.

A recession is almost certain, but not due to home sales and a “bubble burst”

Home prices will settle down in 2022. Home values will continue to increase compared to 2021 and years prior. As long as there is a shortage of homes to be sold and more buyers seeking homes – values (pricing) will remain strong and increasing. On average, homes appreciate in compounding value by 2.3% year over year. Obviously different in a given market or even neighborhood, but that’s a safe average. As long as a home is well maintained, gets periodic updates or improvements, it will continue to appreciate in value.

The risk of a housing bubble burst is not impossible. But the likelihood of it being severe and wide-sweeping is very low. There will be markets where prices will drop severely due to affordability and buyers retracting. Understand that real estate home sales are measured at the state, county, town and neighborhood level. Not nationally. National measures are for media headlines.

2022 and 2023 Outlook

The increase in home sales will slow down. Pricing for homes will stop increasing in double-digit percentages. The measure of “days on market” will start to increase. Fewer homes will be sold over list price. Hmm. Actually, that is what happens every year. Real estate home sales are seasonal. More homes are sold during certain times of year and when prices are higher.  Then we head into the Fall and Winter months and home sales slow down, Prices come down. Houses sit longer on market. It happens every year.

But in 2022 and in 2023, we will see a more severe downturn. This will be due to inflation and the general cost of living forcing buyers to use savings for a house to cover grocery, gas, rent and other daily bills. The increase in mortgage rates will be the other reason real estate home sales slowdown. And, if we head into a recession (as predicted by many) in 2023, more buyers will be put on the sideline. Home pricing will falter.

It Won’t Last for Long

With economic recovery comes spending and a return of home buyers. So while we may see a retraction in the latter part of 2022 and for most or all of 2023 and likely into 2024 – home values will still be elevated compared to prior years. In 2009, when home sales plummeted, the median price of all homes was still (at the lowest point in the recession) $15,000 higher than in 2003. Home value will always increase. As the saying goes, “land, the one thing we’re not making more of”.

Let’s Talk about Real Estate, Home Sales, Recession, Renovations, you name it…

I could go on and on about what I think is coming in the real estate world, or just about economics. Have questions? Give me a shout. Always happy to chat. But if you have questions about selling (or buying) and just want another perspective. I’m always happy to help and there is never an obligation to talking to me. If I can help you become more informed and make a better decision about what is right for you, that’s good enough for me.

Thanks,

g.