Last year proved to be an unexpectedly good year for housing in general and mortgage companies in particular.
Ten years after the end of the financial crisis, low interest rates and strong home-price growth contributed to a banner year, with consumers sitting on record amounts of home equity to tap. But the ten-year mark also spawned a host of predictions for a coming recession, maybe even in 2020. Our economy operates on a cycle, and a full decade of growth seems bound to end with a downturn.
But just as one of the most famous car chases in U.S. history forever tied itself to the Ford Bronco, the word recession became interlinked with the fear-inducing phrase “housing crisis.” The scars of the crisis are still very raw and very real for potential young homebuyers…
“Younger people or anybody who was unfortunate enough to have someone close to them go through the foreclosure process have a ‘mind scar,’ and that mind scar doesn’t go away,” Bob Walters, president and chief operating officer for Quicken Loans, said in an interview with HousingWire.
“I think of my grandmother, who would never put a nickel in the stock market. She put it in a bank, and whenever she hit the FDIC limit, which wasn’t often since she wasn’t a wealthy lady, she’d start up an account at another bank because she wanted that insurance,” said Walters. “Her parents went through a terrible time in the depression, and she never forgot that. I think there is some aspect of that now with young buyers, even though it’s now been 10-11 years since the crash.”
Not all recessions are Great
Somewhere over the last 10 years, the word recession turned into a “dirty word” for aspirational homebuyers. As the word “recession” floods news headlines, people in the industry might know the current strength of the housing market, but for the people who aren’t eating, sleeping and breathing mortgage finance, it brings not-so-distant memories of the housing crisis. Constant use of the word “recession” also makes it difficult to convince people to buy homes if they subconsciously think “housing crisis” every time they hear about a possible recession.
The Great Recession, housing crisis and financial crisis are often used interchangeably when referring to the events that transpired a decade ago. However, they don’t all mean the same thing (for an in-depth breakdown, go here).
The University of California, Berkeley, summarized the situation this way: “The Great Recession that began in 2008 led to some of the highest recorded rates of unemployment and home foreclosures in the U.S. since the Great Depression. Catalyzed by the crisis in subprime mortgage-backed securities, the crisis spread to mutual funds, pensions, and the corporations that owned these securities, with widespread national and global impacts.”
The housing market was at the center of the Great Recession, but recessions are not traditionally contingent on a housing market crash.
Zillow Economist Jeff Tucker explained in an interview with HousingWire that the 2008 recession was a unique recession, especially from the perspective of housing.
“It is the closest analogue we’ve had with the Great Depression in terms of the magnitude of employment losses and the amount of time it took to dig back out of that hole. It would be extraordinary if we were to see something like that again,” Tucker said.
When looking at the core components of the Great Recession and 2008 housing crisis, Odeta Kushi, deputy chief economist with First American, said in an interview with HousingWire, “The combination of rising home prices and broadly available credit were underlying causes of the Great Recession, which led to foreclosure and default levels not anticipated by the owners of financial securities backed by loans originated at that time.”
The uniqueness of the factors leading up to the Great Recession is very familiar to those in the mortgage and real estate industries. But the fact that most young homebuyers can still recall the struggles of their parents and peers living through the crisis, all while possibly trying to find a job or plan for college, has created a new narrative around what recession means.
Not only are Millennials the largest generation, according to Zillow, but a large percentage of them have yet to enter the home-buying market. The median age of the first-time homebuyer is 34, putting them in their early 20s when the housing crisis hit — the prime age to be graduating from college and looking for a job in an environment where there were few jobs. On top of this, the largest three-year cohort in the U.S. is 24 to 26 years old, meaning there’s still a giant wave of Millennials left to hit the market who were in their early to mid-teens during the crisis.
For perspective, the next closest recession in their lifetime was the dot-com bust from March to November 2001, but because that affected business assets much more than the actual homes people lived in, many young people didn’t live through it in the same way. An article from FiveThirtyEight explains that despite the 2000 dot-com bubble burst and the housing market crash having similar impacts on household wealth, the impact on consumer spending was vastly different.
The idea of a recession isn’t the only reason many young homebuyers are on the fence about homeownership. But understanding how young people interpret economic news is a good opportunity for lenders, and the entire real estate industry, to pause and put themselves in the shoes of young homebuyers. Phrases and words like “rising home prices,” “low interest rates” and “recession” require a lot of context that industry insiders are already privy to.
What really constitutes a recession
Before people can process the impact of a possible recession in 2020, they need to understand what a recession means, and for starters, that it’s not synonymous with a housing crisis. A recession doesn’t mean massive foreclosures.
For more on the possibility of a recession in 2020, check out the articles here, here and here, along with this quote from Walters. “The likelihood of recession is relatively low. However, we are 10 years into an economic expansion. Historically, one of the most powerful metrics to predict the possibility of the recession is whether or not the yield curve is flat or inverts, and it’s gotten very close,” he said.
“It usually takes some kind of an economic shock to push an economy into a recession. A trade war could potentially be one of those shocks. But it seems like we’re getting through the trade war, and those other possible shocks seem distant. It’s a pretty benign, if not benevolent, environment for housing and jobs right now, so I think 2020 should be another good year,” Walters said.
To truly appreciate this prediction, it takes an understanding of the dynamics that go into a recession. Kushi explained it best, stating, “The technical definition of a recession has always been two consecutive quarters of decline in GDP, which is the $1 amount of stuff that we produce in the economy.”
“This is simply saying that as production flows, the demand for goods flows, and you start to have an economy that’s entering a recession,” said Kushi. “This typically means that people start to experience a bit of a lower standard of living, you have some employment uncertainty, potentially some investment losses, decline in income and manufacturing and things like retail because people aren’t buying as much.”
The yield curve that Walters referenced has predicted every recession in the past half-century and is something to pay attention to. In essence, when the yield curve inverts it has historically signaled a recession since it’s a gauge on how investors feel about the economy two years out. (This article from Vox breaks down what the yield curve means and also includes a detailed video that’s helpful to watch.)
But there is more context to the yield curve that’s important to understand. Kushi expanded on the history behind the yield curve, stating that the yield curve has inverted 20 plus times, and of those times, only five have resulted in a recession. “It’s correlation, not causation necessarily.”
Kushi also pointed to another metric that has helped predict recessions since it reflects both consumer demand and builder demand. Over the last 14 years, a decline of 20% or more in single-family housing starts has preceded all but one of the last five recessions, making it a pretty good leading indicator.
However, even with all of these metrics that aim to predict a recession, it’s still important to separate them from a housing crisis.
A recession meets today’s housing
The Great Recession may be the most recent memory of a housing crisis, but there is a lot of data to prove how resilient the housing market is. When looking back on the 2008 recession, Kushi noted that the housing crisis during that time was so unique because it was largely fueled by the fact that job loss was paired with a lot of homeowners who had low home equity.
Even if there were to be another recession in 2020, Kushi said the impact on the housing market will look drastically different than the mind scar that lingers from the last recession.
“Historically, home prices have kept rising during recessions, probably because rates fall and the majority of people have retained their jobs. You also have household formation continuing and existing home sales have barely declined. If anything, in the next recession, housing may be more like a safe haven rather than what a lot of Millennials view it as, which is as a cause of a recession,” said Kushi.
If buyers are waiting on the sidelines because of a narrative they’ve built around a future recession, they’re waiting for a scenario that if played out, would be pretty ominous.
Following this train of thinking, Tucker said that it would take a very severe recession to cause prices to fall significantly. In that hypothetical situation, he said, “You’re thinking, ‘I’ll just wait till they’ve fallen significantly,” but that actually means you’re probably waiting until you’re in a more precarious economic situation to buy a home. So then, you’d have to start thinking about what would cause this severe scenario to happen.”
The idea of timing the market in light of a possible recession is based on several flawed assumptions. That idea is overdue for some corrections, starting with some healthier variables to base the decision on.
The makings of a “good time to buy a home”
Before the Great Recession came along, there were ways buyers could look at the health of the housing market that are still available today but tend to be forgotten. As Quicken Loans’ Walters noted during the interview, there has been a shift over the years at how people choose to buy homes.
“Something in the last 20 to 30 years changed a bit where people started looking at real estate as an investment more than where they’re going to live. This is fine, but I also think people make mistakes when they think about it from that perspective,” Walters said.
“The way I look at it is that a house is very different than a stock. I always say, ‘Don’t let the tail wag the dog.’ You buy a house because that’s where you’re going to live, where you’re going to raise your family and it’s the community you want to be part of,” he said.
Zillow’s Tucker had similar sentiments, noting that timing the market is really difficult. “No one has a crystal ball for what prices are going to do,” he said. Instead, he framed the idea of purchasing a home around what people can live in and the lifestyle they can have at what monthly cost.
Then, once this foundation is in place and if buyers still want to try and figure out the market, Walters suggested looking at demographics. “It almost always supersedes everything else. Is population growing in the area? Is it static? Is it falling? If it’s growing, you could make a pretty good judgment that home prices are going to continue to grow in that area. If the population is falling, the opposite could be occurring,” he said.
One of the reasons “recession” start to pop up in a lot of news headlines ahead of 2020 is because of that closely watched yield curve, which inverted in August 2019. While a lot of forecasts have changed their tune since that happened, with a recession in 2020 less likely now, it’s only a matter of time before a recession does happen. But before it does, lenders and real estate agents can help educate consumers and shift the conversation to the strengths of the housing market and the benefits of homeownership. Otherwise, potential buyers are bound to stay on the sidelines, trusting false assumptions that were put in place following the Great Recession.
Walters explained it well when he said, “Make your decision about buying a home primarily on the type of home that you’d like, forgetting, just for a second, the economics. Is it right for you? For your family? For your future? You should get comfortable with that first, and then, if you’ve gotten comfortable with that, you can take a look at where interest rates are and what’s happening in the economy.”