Expected Price Drop May Cause Double-Dip Recession

While we can all agree that high prices and low inventory is not a recipe for a healthy real estate market, reversing the trend too quickly can cause issues as well. Prices are predicted to start declining towards the end of 2022 and throughout 2023 and 2024. This may be good for prospective homebuyers, but it’s not good for sellers who purchased relatively recently.

A sharp decline in prices could result in negative equity for some people looking to sell, meaning that they won’t be able to sell normally and may have to go into foreclosure. This is not the same type of recession that we’ve just experienced, but it’s a recession nonetheless. Fortunately, it’s not likely to result in a crash, since the continued low inventory is a positive for sellers. The market is expected to begin to stabilize in 2025, but not without steep economic losses.

Photo by John Fornander on Unsplash

More: https://journal.firsttuesday.us/how-to-prepare-for-the-reo-resurgence/83443/

LA South Bay Real Estate: The Recession Has Arrived

In a normal year one would expect April to be the turning point for the LA real estate market. March is still cold and the children are still in school for another 10 weeks. April’s the month when the weather turns warm, the flower buds poke up, and the buyers come out to start the spring buying season. It hasn’t happened that way this year.

Prices had gone through the ceiling by the end of 2021, much of the activity stimulated by fear of escalating mortgage interest rates. Usher in 2022–January and February were typically slow and in March home sales bounced up like an indicator of business as usual. But, interest rates continued to climb and April ended with the total number of home sales down instead of up. Likewise, total sales dollars were down across the South Bay.

Number of Homes Sold

Judging from the charts, entry level homes in the Harbor area were clearly the center of activity for South Bay real estate. As interest rates pushed against the 5% mark, panic set in among first time buyers who had been outbid multiple times. Prices went up as high as buyers could afford, a number that shrinks amazingly fast with each tenth of a percent increase in the interest rate.

Across the South Bay, the number of homes sold in April dropped by -4% from March, which had been an increase of 59% over the prior month. As we see from the chart below, sales were uneven between the various areas.

On the entry level front, at the same time Harbor area home sales were dropping off, Inland homes gained sales. On the high end, sales on the Palos Verdes peninsula were also facing declining numbers, while Beach area sales increased.

So far declining sales counts have been modest, but a decline overall, coupled with a decline in half of the individual areas covered indicates that buyers are pulling back. Part of the resistance is a matter of simply being priced out of the market. Another important piece is the anticipation of price corrections in the near future. We have heard multiple buyers say they are watching and waiting for lower prices later this year.

At this point we’re well into the second quarter of the year and it looks as though those folks may be on track for some savings. even some of our most gung-ho pundits are beginning to see a market downturn on the horizon.

Median Price Sold

Interestingly, Harbor area prices went up at the same time the number of sales went down.The March to April price increase was a modest +6% compared to a +21% increase over April of last year. Similarly, the Beach cities had a month over month increase of +4%, while showing +19% year over year. While sales prices are still rising in those areas, the increase is a fraction of what it was last year.

Sold prices on the Hill continued to slide downwards. Because the February increase in the median price was created by the sale of new construction, and that building phase is now sold out, a downward turn in median price is expected. We anticipate that leveling off soon.

In the Inland area the median price for homes sold during April of 2022, was +12% greater than sales in April of 2021. By comparison, the median price of those sold in March of 2022 versus April of 2022 decreased by -1%. It’s a modest decrease that points to the direction of the South Bay real estate market for the balance of the year.

Area Sales Dollars

The total dollar value of home sales in the South Bay usually tracks right along with the number of units sold. The few times it differs are important times like these when the number of homes sold is dropping, and/or the sales prices are dropping. Today, of the four areas we track, PV Hill has a declining number of sales, both in comparison to last year and in comparison to last month. As we noted above, the area also is declining in total dollars compared to last year and last month.

As we discussed in last month’s issue, some of the reason for the drop is found in new construction homes that sold at a much higher price than the typical Palos Verdes resale home. The rest of it can be found in longer days on market waiting for a buyer, and in price reductions.

At the opposite end of the spectrum, the Beach cities showed gains last month for both number of units sold and for the total sales value of those homes. The only decline this month for the Beach was in number sold compared to April of last year. Sales this April were off by -21%.

The Harbor area still trended upward in dollar value, both month over month and year over year. But, the number of units sold was down for both time measurements. The price competition was very stiff in what is generally an entry level market. During the past couple years, bidding wars and over-asking sales prices have kept the dollars high. The April numbers show that changing rapidly.

Total dollar sales for the Inland community increased 15% month over month. That was the highest growth of all four areas. Scanning those individual transactions showed an odd pattern. Sales in the price range from about $325K up to about $750K were a familiar mix of some under asking price, some at asking and some above asking. The degree of variance was about what one would expect. Unexpectedly, for sales over $750K, nearly every property sold above asking price, and in many cases well above asking.

We found no clear explanation for why this phenomena occurred. There is a suspicion that buyers who were priced out of Beach properties may have shifted their bidding wars into the increasingly popular parts of west Torrance. This theory is supported by the distribution of sales among the various neighborhoods.

In Summary

In the table below are the core statistics comparing April to March of this year, and comparing April of this year to April of 2021. The prevalence of negative numbers is convincing evidence that high prices and high interest rates are pushing the South Bay real estate market into a recession.

Notable Properties

One of the more interesting properties sold in April is a four bedroom, five bathroom home located in west Torrance. The home was purchased by the seller as their family home in 1990 for just above $360K. The children grew up and the parents remodeled in 2022 and sold the house.

As would be expected in a good neighborhood with a contemporary remodel, the home sold for over the asking price of $2.7M. The final selling price was slightly over $3M. and just happened to be almost exactly $360K over the asking price.

In the 32 years that family owned the home it appreciated at an average rate in excess of $84K per year. It’s the classic “American Dream.”

Main photo by Amy Vosters on Unsplash

Stagnant Wages Major Struggle for First-Time Homebuyers

Many older people think of Millennials as being young kids who have no life experience and no financial know-how. The reality is Millennials are in the normal age range for first-time homebuyers, and some are even older. Their financial problems are not due to lack of knowledge. It’s due to a series of economic struggles that were completely out of their control.

Most Millennials came to age during the Great Recession, and so employment simply wasn’t available during the years when they were expected to find a job. That has made it more difficult to find one even after the Great Recession ended, as employers are expecting someone their age to have more experience. The 2020 recession, during a time when society expects their age group to be looking for a house, hit Millennials yet again.

In addition, inflation has far outpaced wage growth. Even those Millennials who have a job are not earning nearly as much adjusted for inflation as older generations were at the same age. Only about half of Millennials are employed full-time, and less than two-thirds are employed at all. Even though wages are increasing, they are still stagnant because of how quickly prices are increasing. Between 2012, when the market was finally recovering from the Great Recession, and 2020, when the most recent recession started, wage growth was at 24%. Home prices, however, went up over 3.5 times as much, by 86%.

Photo by Jp Valery on Unsplash

More: https://journal.firsttuesday.us/employment-and-wages-highest-hurdles-for-millennial-first-time-homebuyers/82778/

Market Stability Anticipated In 2024

With government support having ended, this may prompt people to think the economy has stabilized and recovery is imminent. But this is just the precursor to a stable market. The market needs time to adapt under normal conditions, and probably won’t become stable again until 2024. The main factor in overall recovery is the job market, which has yet to fully recover, and a stable real estate market requires construction to catch up to demand.

Some policies remain from government actions during the recession, though. Three laws — SB 10, AB 345, and AB 571 — will help out in construction efforts. SB 10 allows more areas to be zoned for up to 10 units, AB 345 allows ADUs to be sold separately from the primary residence, and AB 571 prohibits impact fees on affordable housing. Two more laws, SB 263 and AB 948, reformed bias training for real estate professionals. This legislation should have lasting impact in making the recovery more comfortable.

Photo by Logan Cameron on Unsplash

More: https://journal.firsttuesday.us/2021-in-review-and-a-forecast-for-2022-and-beyond/81281/

Renters Overtake Homeowners in Suburbs

Homeownership has been a mainstay in suburban areas, where the typical house is a single-family residence or possibly a duplex. Residents in these areas have tended to be middle- or high-income earners. All of this is starting to change as the demographic is switching to Millennials and Gen Z homeowners. The majority of residents in suburbs are now renters, unable to afford to purchase a home.

Millennials and older Gen Z people inherited the effects of the Great Recession, which delayed their careers and consequently their ability to own a home. This also compounded with student debt, since Millennials are a highly educated generation. All the while, prices are increasing but wage growth is stagnant. While some of these people recovered somewhat since the Great Recession, others were still trying to get back on their feet or were just entering the job market when the 2020 recession hit. Most of Gen Z is still not old enough to own a home, so it’s unclear whether this would extend to them as well.

Photo by Dhru J on Unsplash

More: https://journal.firsttuesday.us/californias-suburbs-flip-as-millennials-and-gen-zs-become-majority-renters/

End of Forbearance Plans Could Swing the Market

With the foreclosure moratorium ending, the only thing keeping many homeowners in their homes is a forbearance plan. Once those end, the effects on the market could be drastic. The good thing is that it’s easy to predict when that will happen, since forbearance plans have a designated end date. Many of them have already ended in the past two months, but we will continue to see more ending throughout the rest of the year.

One of the effects of a large increase in foreclosures or forced sales is plain to see, and that is an increase in inventory. With inventory being so low right now, one could be forgiven for thinking that’s what the market needs. But it most certainly is not. Let’s take a look at the reasons demand is so high right now: low interest rates, and the fear-of-missing-out (FOMO) mentality that buyers have when inventory is low. Interest rates are going back up now, so that’s no longer an incentive to buy. If inventory increases drastically, FOMO won’t be a factor either. Foreclosures and forced sales will remove all incentive to purchase while increasing inventory considerably, causing a full swing in the market. But that’s not all. People living in foreclosed-on homes aren’t just statistics; they are actual people, and their increased economic struggles will only make it more difficult to reach a recovery point in the recession.

Photo by Ruslan Khadyev on Unsplash

More: https://journal.firsttuesday.us/how-1-5-million-homeowners-exiting-forbearance-will-impact-inventory/79744/

Today’s Housing Bubble Will Likely Deflate — Not Pop

There are many similarities and also many differences between the current recession and the Great Recession of 2008. Two of the core similarities — and the ones that define a housing bubble — are that prices are accelerating faster than purchasing power, and that there are changes in consumer values. While legislation and shifting values have addressed some of the issues that contributed to the Great Recession, most notably subprime lending, ultimately the crisis was a relatively natural economic response to the events that triggered it and followed a normal boom-bust-rebound cycle. The 2020 recession is somewhat of a reflection of this, though the specifics differ. The economy was already headed towards a natural downturn in the cycle, but the process was sped up by the COVID pandemic.

That’s where the similarities end, though. While nearly everything is ultimately tied to the economy in some way, it’s the pandemic, more so than economic conditions, that prompted valuation changes. Preference for larger homes and home entertainment, rather than homes closer to work and out-of-home entertainment, will probably continue as long as work-from-home remains a common practice, which will likely last a while. It’s true that people are leaving large cities and moving to cheaper areas, but this is more so out of necessity than desire. Peoples’ tastes have actually become more expensive, even if their wallet isn’t any larger. An economic downturn wouldn’t prompt this behavior. The only reason this isn’t currently sustainable is that the market hasn’t recovered yet. Once it does, probably around 2024-2025, it’s likely that the bubble will slowly deflate rather than explode.

Photo by Nathan Dumlao on Unsplash

More: https://journal.firsttuesday.us/shifting-fundamentals-what-2008-can-teach-agents-about-2021/79690/

Recession Declared Over, But We’re Not Out of the Woods Yet

The National Bureau of Economic Research (NBER), a private non-profit economic research institution well known for researching recessions, has declared that the 2020 recession is over. In fact, it ended quite a while ago, and only lasted two months, the shortest recession in history. NBER defines the start of a recession as the month following a peak inĀ economic activity, and the end of a recession as the month at the bottom of economic activity. In this case, those months were March 2020 and April 2020 respectively. The delay in declaration is because it generally takes several months to figure out whether a recession is truly over or not, since there can be ups and downs in between the peak and trough. With this declaration, another downturn would officially be considered a separate recession.

So what does this mean? Well, it doesn’t mean the economy is healthy again. It just means we’re past the worst of it, and are in the recovery stage after the recession. We’ve been in recovery for quite some time, and will continue to be. It’s important to note that while the start of the pandemic and the start of the recession occurred at approximately the same time, they aren’t codependent. Rather, the pandemic was merely an exacerbating factor in a recession that was already approaching. Many of the effects, both psychological and government mandated, of the combined scare of a simultaneous recession and pandemic are still lingering and slowing down the recovery. The major factor keeping us back is lack of recovery in the job market.

Photo by Erik Mclean on Unsplash

More: https://journal.firsttuesday.us/the-2020-recession-was-the-shortest-ever-but-its-effects-continue-in-the-housing-market/78835/

End of Utility Disconnection Moratorium Could Spell Trouble

Last year, the California Public Utilities Commission (CPUC) imposed a moratorium on utility disconnects for nonpayment. The CPUC moratorium applies to both residential and commercial buildings, and they regulate the majority of electric and gas companies. However, this moratorium is slated to end July 1st, and the total amount owed is fast approaching $2 billion.

Utility companies aren’t about to simply forgive all of these charges. Fortunately, they’re thinking of plans that can help people balance their debts without owing large lump sums. Possibilities include partial forgiveness and/or rate categories, or even full forgiveness for qualifying households. California is also working on including utility aid in their state budget plan.

Photo by Federico Beccari on Unsplash

More: https://patch.com/california/redondobeach/s/hlwq5/unpaid-ca-utility-bills-approaching-2-billion-survey

Not All Recessions Are Created Equal

The real estate climate is currently in a state of rapidly rising prices, while in the midst of a recession. Some people are having flashbacks to the Great Recession of 2007 and fearing a housing bubble and imminent crash. But there are some important factors that make this nightmare not a likely reality.

Leading up to 2007, there was an overabundance of supply due to high rates of construction. Loose lending practices were the trigger, as they resulted in mass foreclosures and subsequent drop in demand, making sellers who were liable for foreclosure unable to find buyers to get them out of their hole. This is the opposite of what’s happening now. Supply is incredibly low due to a lack of construction, and buyers are facing cutthroat competition. There are no foreclosures happening right now because of the foreclosure moratorium. Even when the moratorium ends, the number at risk of foreclosure is much lower.

In some ways the real estate market is actually a strong point of the current economy, despite the recession. So a housing bubble isn’t to be expected. But that doesn’t mean we’re out of the water; the recession still exists. And it’s not going away until job recovery happens, which isn’t expected until 2024-2025.

Photo by M. B. M. on Unsplash

More: https://journal.firsttuesday.us/pricing-crash-or-near-miss-the-factors-different-from-the-last-recession/77815/

Current Hot Market May Not Be Sustainable

After lockdowns ended, the real estate market was inundated with prospective buyers who seemed to be itching to take advantage of low interest rates. Interest rates have started to climb back up, yet demand currently shows no signs of slowing, despite continuously rising prices. So what’s the actual reason demand is high, and perhaps more importantly, is it a good reason?

The stimulus packages are a likely culprit. A government stimulus is always going to effect short-term change, but its goal is also long-term change. This is done by a multiplier effect — when people have more money to spend, they spend more, which causes the money to recirculate and improve GDP. However, it’s important to realize what the money is being spent on. Between a quarter and 40% of stimulus money was spent on food, household goods, and debt, and much of the remainder was saved. The stimulus certainly helped people to get through the recession, but it didn’t actually do much to improve the economy as a whole.

From the outside, the real estate market looks like it’s recovering, since it’s becoming more competitive when there isn’t much reason for it to be any longer. In reality, most of the people who can afford to buy right now could already afford to buy before the pandemic, and the rest are perhaps falsely optimistic. The primary factor that can result in long term recovery hasn’t happened yet, and that’s job recovery. The job market isn’t expected to recover until 2025, long after the eviction and foreclosure moratoriums end.

Photo by Maria Lin Kim on Unsplash

More: https://journal.firsttuesday.us/riding-the-stimulus-wave-when-will-it-end-for-real-estate/77854/

Mortgages Keep Market Competitive Despite Lack of Job Recovery

2020 saw a large increase in mortgage originations, particularly refinances, as a result of low interest rates. It was expected that this would start to fall off in 2021, since interest rates are starting to go back up. However, they’re still low enough that refinances continue to be common. The statistics are a bit misleading for purchases, though. Low inventory is boosting home prices, accounting for a significant part of the increase in loan origination dollar amount even beyond increasing the number of loans originated.

Something is still missing, though. Even though much fewer loans are delinquent now than in 2020, the share of them that are over 90 days delinquent is increasing. This is because people continue to tread water through moratoriums, but aren’t earning any money. Jobs still haven’t recovered from 2020. Foreclosure moratoriums and forbearance programs are going to end eventually, and that’s going to be a problem for some people who have lost their jobs during the pandemic and haven’t been able to find work yet. If home prices continue to rise without an actual jobs solution, these stopgap measures are going to be the proverbial dam that causes the market to crash when it breaks.

Photo by Jilbert Ebrahimi on Unsplash

More: https://journal.firsttuesday.us/mortgage-originations-will-2021-shatter-2020s-record/77747/

More Measures Needed to Protect Jobs During Eviction Moratorium

The eviction moratorium has received multiple extensions, buying tenants some time to gather necessary funds. Unfortunately, buying them time doesn’t actually aid them in getting funds, and all the while, landlords are also missing a portion of their income. There is no plan for loss mitigation. SB-91 may help somewhat — it allows landlords to acquire 80% of their rent payments via federal funds by waiving the remaining balance. However, this law exists only in California, and doesn’t apply to all rental situations.

Landlords do have another way to mitigate their losses, but it’s not a good option. Landlords who are close enough to do the job themselves could reduce their costs by laying off their property managers and maintenance staff. This doesn’t help anyone, though, and results in increased job losses. While landlords definitely do take a risk in getting a mortgage on a rental property, currently their best recourse to offload that risk is in ways that do nothing to aid a recovery and instead exacerbate job losses. It may be tempting to let risky investments fail, but at the same time, it could be worthwhile to also give landlords as well as tenants some breathing room to avoid worsening the issue.

Photo by HausPhotoMedia on Unsplash

More: https://journal.firsttuesday.us/the-eviction-moratorium-extension-a-band-aid-solution-for-a-gunshot-wound/77162/

Despite Rebound, Job Future Not As Bright As It May Seem

With the pandemic creating an employment nightmare, the unemployment rate has been a closely watched statistic. Employment is still below pre-pandemic levels, but has rebounded fairly well. That may be giving us false hope, though, since there are other jobs-related statistics to consider.

In a previous article (https://www.carlandarda.com/?p=1370) we looked at the difference between employment rate, measuring what percentage of those in the labor force have jobs, and labor force participation rate, measuring what percentage of people are able to hold jobs, whether they currently do or not. We already saw there that LFP dropped as a result of the pandemic, indirectly reducing the unemployment rate without actually creating jobs.

But there’s another statistic that sheds some light on what the pandemic has done to the jobs market. The long-term unemployment rate specifically measures what percentage of those looking for a job have been searching for 27 weeks or more. Before this recession, the LTU rate has been around 20%. This means that 80% of unemployed people were finding jobs, retiring, or giving up entirely within six months. This rate has been going up rapidly and was at 37% as of November 2020. Not only have more people given up or been forced into retirement, but more of those still searching for jobs aren’t able to find one quickly.

Photo by Michal Matlon on Unsplash

More: https://journal.firsttuesday.us/2020s-rebounding-jobs-market-masks-deeper-troubles-for-real-estate-in-2021/75571/

Most Younger Generations Still Can’t Afford to Buy

Many would-be homeowners in the Millennial and Gen Z generations are going to need to wait. Despite the fact that some who wished to buy are instead renting, apartment vacancies are on the rise as 27.7 million have moved back in with parents or other relatives, if they ever left home at all. The good news is that this number is dropping, but only the luckiest of them will be able to snatch an opportunity in the coming months amid heavy competition.

11% of renters were excited to make the transition to homeownership in the beginning of 2020, but the COVID-19 pandemic and the recession squashed those dreams for many of them. Those who experienced income loss as a result of the pandemic are twice as likely to have trouble with paying bills, rent, or mortgage, or need to withdraw savings or retirement or borrow from friends or family. That isn’t the whole of the problem, though: California has been lacking affordable housing for decades as a result of mere population growth, an issue that was only accelerated by the recession and lockdowns, which have slowed or halted construction.

Photo by Georg Bommeli on Unsplash

More: https://journal.firsttuesday.us/homeownership-remains-elusive-for-young-adults-amid-recession/74939/

The K-Shaped Recovery: What Is It?

You’ve probably heard of a W-shaped recovery, even if you don’t know what it means. This refers to a false start in recovery, whereby the economy is improving in one sector, but doesn’t have the momentum to continue recovering, so it wobbles a bit. This has been what experts believed the current recovery would be like. Now, though, some people are wanting to call the recession and recovery K-shaped. What does this mean? It means that some sectors will recover and retain their momentum, while other sectors haven’t yet left the recession and continue downward. In other words, the recession has very clearly disproportionately affected various groups.

More specifically, this recession has had comparatively little impact on wealthy individuals. People with higher paying jobs are more likely to work in fields that can be done from home, so they haven’t been out of work during the pandemic. People who have the capital to invest in stocks as their primary means of income don’t have to worry so much about the pandemic, since stocks can’t get sick. They’ve actually been on an upward trend since before the lockdowns even began. Even those higher-income workers who did experience losses won’t have as much necessary expenditure proportional to income as those living paycheck to paycheck. This means that the recession has significantly widened the already large income inequality gap.

Photo by Volodymyr Hryshchenko on Unsplash

More: https://journal.firsttuesday.us/2020-recession-stretches-income-inequality/74733/

Real Estate Speculation Expected to Rise

As with any recession, at some point the direction of prices is going to change. In most cases, real estate speculators purchase at low prices so they can later sell at a higher price. Currently, speculators are most likely to be sellers, not buyers, since home prices are already high, and are expected to decrease in 2021 as sales volume continues to drop. Once prices start dropping, as buyers are waiting for prices to bottom out, sellers are looking to sell as quickly as possible to get the most money. With more seller willingness, buyer speculators are also coming in 2021.

Given the current high buyer demand, a sudden increase in seller willingness is going to look like the beginning of a recovery. Don’t be fooled by this. Speculators are generally people who can afford to be wrong. This increase in activity is not going to be a result of a stabilizing economy, but of opportunists who were largely unaffected by the recession wanting quick sales. Speculators generally only constitute 20% of buyers. For an actual recovery, the rest of the populace needs a stable income. That means job recovery, which isn’t expected until 2023.

Photo by Thought Catalog on Unsplash

More: https://journal.firsttuesday.us/prepare-now-for-the-return-of-real-estate-speculators/73795/

Job recovery will be slower than expected

Reports demonstrate record job gains in California in the last few months, nearly 700,000. But that doesn’t mean we’re actually making new jobs. It means that we lost so many jobs this year that even recovering a small percentage of them is going to look like a large number. There were actually over 2.7 million jobs lost in California between December 2019 and April 2020, significantly more than were lost in two years during the 2008 recession. So we’re still a long way off from returning to the December 2019 peak, let alone generating new jobs.

Federal assistance has been necessary to keep the economy floating, but it’s also been inadequate. We’re going to need a lot more help. A COVID-19 vaccine is a solid step, allowing more people to return to work. It’s not going to be enough, though, since the economy was already on a downward trend before COVID-19 — recall that the peak was December 2019, three months before the lockdowns. The recovery is expected to be W-shaped, with some unstable gains from now through 2021, and no clear upward trend until 2022 or 2023. Even then, job recovery will have just started, and the real estate market is going to need even more time after jobs start back up.

Photo by Ibrahim Rifath on Unsplash

More: https://journal.firsttuesday.us/job-losses-will-inevitably-continue/73104/

Despite fierce competition, it’s not indicative of recovery

Throughout California, homes are selling quickly. 46% of homes are on the market less than two weeks. Using data from Redfin, 54% of offers were contested. The breakdown by region is 67% in the San Francisco/San Jose area, 65% in San Diego, 58% in Los Angeles, and 47% in Sacramento. However, don’t mistake this for a healthy market — we’re still in a transition period.

The actual reason for low days-on-market is a combination of high buyer demand, due to low interest rates, and low inventory. Those who are able to buy correctly recognize this as a great time to do so if you are able to afford it, and are scrambling to get at what few properties are available for sale. Even the high demand, though, is merely high relative to inventory — there still aren’t very many people who are able to afford a purchase right now. Whether or not we get a COVID-19 vaccine before then, the housing market won’t properly right itself until the job market stabilizes. The expectation is that this won’t happen until 2022 or 2023.

Photo by Randy Fath on Unsplash

More: https://journal.firsttuesday.us/summer-2020s-unseasonably-hot-housing-market/72921/

Here’s why house prices are still high despite the recession

It may seem intuitive to look at past recessions, such as the one in 2008, to predict the market during the current recession. But that doesn’t always work, since the circumstances surrounding the downturn may be different. In 2008, what caused home prices to drop was reduced buyer demand and increased foreclosures and short sales. Now in 2020, that’s not happening.

Buyer demand is actually relatively high right now, as a result of interest rates being low. The Fed decreased interest rates in 2019 in expectation of a recession. They were right, of course, but couldn’t have predicted the exacerbating effect that COVID-19 would have. Interest rates can’t get much lower without the Fed going negative, so the market doesn’t have anywhere to go. Foreclosures may be on the horizon if federal and state governments don’t maintain protections. But for the time being, there’s a moratorium on most foreclosures, so there’s no need to drop home prices. Another factor is the lack of construction. With fewer homes being built, especially in the form of affordable housing, low inventory means there’s no competitive pressure on sellers to reduce prices.

Photo by bruce mars on Unsplash

More: https://journal.firsttuesday.us/letter-to-the-editor-why-are-prices-still-rising-even-though-were-in-a-recession/72735/