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Are we due for another real estate recession - Beni Restea - ContactCenterWorld.com Blog

Are we due for another real estate recession

The crash of the Stock Exchange and the bank runs led to the Great Depression. Less than a century later, the unquenchable greed of the banking system was the root of the 2008 economic recession. So, where should we look for the signs of a new recession? There’s no doubt that the love of money is the root of all evil. For years, the market has been going up and down but nobody could really predict the next inflection point. So, how can we tell that we are due for another real estate recession?

Formulating the next housing crash prediction

Every economic recession has a domino effect. And usually, the cause has something to do with money. It must come from the financial sector like a snowball, affecting everything it touches, from big businesses to individuals. Let’s not look further than the last recession. The banking system indulged in hedge fund trading, demanding mortgages of all types, regardless of the credit risk. So, they ended up with a lot of subprime borrowers who soon defaulted on their home loans and the real estate market crashed. With no purchase-power, the economy slowed down and many businesses closed their doors. Unemployment skyrocketed and the market was flooded with so many homes for sale or in foreclosure, that prices plummeted to the ground. Banks were also reluctant to grant loans and some of them were right on the verge of bankruptcy. The game was over. But the US crisis was felt globally. 

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Unfortunately, as long as politicians will enact laws that regulate the economy and don’t allow the market to balance itself, the threat of a new economic recession won’t give us peace. Regulations and deregulations are both dangerous. And the outcome of most economic measures is unpredictable. So, a new economic crisis might be in the making or might have already begun. On top of these, the media shapes public opinion too and can manipulate us into believing anything. On December 31, 1999, the media fueled the generalized fear that the End of the World had arrived and that nobody would be alive on the first day of the new millennium. Since then, the End of the World has been predicted several times. The same goes for economic recessions. Every now and then, a louder voice scares the hell out of us announcing a new crisis. Should we believe it?

The macroeconomics and microeconomics of a recession

In formulating the next housing crash prediction, we have to interpret a few macroeconomic and microeconomic indicators. It may be more comfortable to take everything for granted, but when we do our own research, we are able to make better decisions. The National Bureau of Economic Research defines an economic recession as a notable drop in economic activity spread over a few months which is also reflected in the real GDP, the median income and the unemployment rate. Indeed, if we analyze the real GDP in the US, during every recession, a steep decline can be seen, albeit for a short period of time. Simultaneously, the unemployment rate spiked. At the moment, the real GDP per capita in the US is $57,797. According to the data released by the Federal Reserve Bank of St. Louis, the standard of living is almost four times higher than it was in 1950. We are producing more things, of a higher quality. But we have also learned a lot from the past, which is why economic recessions are quite rare. 

At the microeconomic level, it seems that too much regulation in a market paves the path to disaster. And the truth is that the financial sector is probably the most supervised and politically controlled sector of our economy. Although it’s hard to acknowledge, the banking system alters the economy with every loan it releases. A building that didn’t exist yesterday, today is listed for sale by one of the real estate agents on RealEstateAgent.com and must be turned into cash to pay off the loan granted to the developer. But the buyer doesn’t have the full amount in cash either and so, a new home loan is generated. And so on. There’s always a shortage of cash that keeps people in debt. As long as people use their credit cards to support other small businesses, the lack of hard cash does not become visible, nor does the uneven distribution of wealth. Even our education system fails to prepare us for adulthood by avoiding any serious debates regarding money, keeping it a mystery for all of us. 

In fact, the next real estate recession is more likely to be generated by a small number of people. Don’t you find it strange that only a handful of people know everything about money and are able to make money out of thin air? So, as the banking system continues to sack its employees to make room for new automatic teller machines while moving most transactions on mobile devices, the entire banking system is controlled by very few people. And they can make errors anytime.  

Other micro- and macroeconomic indicators worth analyzing are the foreclosure rate, the homelessness, the US treasury bond yield curve, the Institute for Supply Management index and the consumer sentiment.

Real estate market forecast

One tough lesson from the past is that the economy cannot grow forever. The economic downturn is the price we have to pay for the good times. There are so many variables involved that it’s almost impossible to predict it. Even the whereabouts of our economy are hard to guess. Who knows whether we are on the verge of a huge depression or not? Probably only the force of our hope for the better keeps the graph going up. 

 

According to a Pew Research study, most Americans have a positive feeling about how the country will look like in 2050, but many fear income inequality and a diminished quality of life. When it comes to retirement, 72% of all adults think that those over 65 will be less prepared to retire. Americans also keep postponing their retirement as they age and very few attempt to retire early. Six years ago, 50% of Americans thought of themselves as optimists saying that the glass is half full. However, a Gallup survey also revealed that 61% of Americans think that the next generation is very likely to have a better life than their parents. So, overall, we are optimistic and in a good mindset. 

 

When it comes to housing, the US has three major problems that could lead to significant distress in the real estate market, if not already. 

  • First, there are more people ready to buy a house than the inventory up for sale.  
  • Secondly, the lack of affordable housing in the range of $100,000-200,000 is forcing many to rent and postpone a home purchase. 
  • In the third place, the level of personal debt is astonishing and could threaten the ability to repay credit cards and loans, not to mention the fact that student debt is often the reason why many postpone their wedding, their first home, and, sadly, their first baby. 

 

All these might be enough to make the next housing crash prediction. But let’s not jump to the wrong conclusion so fast. Taking all these into consideration, the first thing we need to do is to protect teenagers from unnecessary debt that could stay in the way of a home purchase. We have to help them build their credit scores and secure a mortgage while their credit scores are still high. Real estate developers also have to build more homes at decent prices especially in the states that experience a high influx of new residents. According to the American Moving and Storage Association, these states are Vermont, Oregon, and Idaho. The top three states that Americans chose to flee from in 2018 were New Jersey, Illinois, and Connecticut. 


While the most expensive cities in the US will continue to lure young entrepreneurs and young professionals in, the USDA loans will revive many rural areas in the future that will become new poles of economic development. As the living costs become unbearable in some parts of the country, people will move towards less expensive areas, especially as they approach retirement. So, we cannot consider these moves as signs of a real estate recession. They are rather a natural behavior influenced by prices.

What would a real estate recession look like?

For a real estate recession to happen, a huge number of homes must enter the market and that can happen due to a high number of defaults and foreclosures. Let’s not forget though that foreclosures are not the end and many people managed to rebuild their lives after a foreclosure. In another scenario, there would be very few buyers in the market willing to buy a home, and that can happen due to an increase in the interest rates that restrict consumer’s access to loans. We must not exclude the possibility to face a surge in the number of unemployed people due to the introduction of artificial intelligence, robots, or even due to the relocation of businesses to third-world countries. Since real estate is the most precious asset, with low incomes, people will hardly be able to afford a home of their own. 

But every recession has its winners. A decade ago, the winners were the real estate investors with a lot of cash who could afford to buy properties at bargain prices. If you’re thinking about becoming a real estate investor, it’s nothing wrong to wonder whether we are due for another real estate recession or not. For the past decade, the US economy has been recovering pretty well and in most cities, real estate has appreciated in value. But it doesn’t mean that you have to wait for a new recession in order to invest in real estate. You can buy right now and apply our strategies for paying little to no interest on your loan. So, find local real estate agents in the cities where people are more likely to rent than buy and explore their listings, including REOs and foreclosures. Whether you buy during a recession or not, do your homework and perform a SWOT analysis on each property you’re interested in. 

Real estate recessions are strange. They are impossible to predict at large scale, yet here and there we can see them happening. But luckily, they don’t last long.

Publish Date: December 19, 2019 3:38 PM

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