How to win in today's US economy?
Although home prices have actually declined in some markets, they're still rising in other parts of the country — but at a much slower rate. While price growth is expected to slow further, Thuany says that doesn't mean prices will go down.
"We expect house price growth to moderate over the summer," Thuany said. "However, we still expect house price growth to remain positive. That means that coupled with higher mortgage rates homebuyer affordability will be stretched even further."
During its season of plenty, the US economy had no issues in meeting its varying needs. This period spanned for so many years, and most people felt that the possibility of a recession coming up was at the barest minimum. In 2007, however, disaster struck as the economy nose-dived, creating what most termed the “Great Recession.”
The result of this particular scenario was extreme, as millions of Americans lost their jobs and homes as the housing market ultimately collapsed.
Although the housing bubble exploded during the Great Recession, it’s crucial to understand that the real estate market’s ultimate crash was set in motion years earlier.
From 2000, house prices in the United States became high, and lending provisions that should’ve been otherwise stringent and rock-solid were loose. When the crisis became full-blown in 2007, numerous foreclosures and defaults resulted in the financial market crash.
The values attached to financial securities associated with subprime mortgages depreciated during this period. Subprime mortgages are terms issued by lenders to borrowers that they consider risky.
Since agents and buyers didn’t follow through with these caveats, things got to an all-time low, resulting in a final collapse. The subprime mortgage collapse left many Americans without homes. With economic stagnation the theme during this period, most people faced financial doom as the properties they purchased via mortgages had their values reduced significantly.
However, there was more peril to come as mortgage rates doubled. These scenarios put together marked a dramatic halt in homebuilding for the growing population. With fewer homes and high demands characterizing this period, property prices were at an all-time high.
Although the US government finally intervened to prevent further damage, the housing market bore most of the negatives associated with the Great Recession.
Does all the pessimism reflect reality ?
Yes and no! The economy is a real mix right now. The labor market is very tight in certain industries, with some workers able to command significant pay rises and favorable benefits and conditions.
In others, conditions are worse than ever, with greater workloads being handed to employees by companies struggling to recruit. This issue tends to be in industries with lower-paid workers, where labor shortages are becoming increasingly common.
We're seeing a similar situation at a company level. It's no secret that the U.S. tech industry is suffering, with some huge falls seen in the stock price of companies like Netflix, Meta and Google in 2022. Other sectors of the economy are reaping the benefits of the misfiring system, with energy producers like Chevron and ExxonMobil, in particular, soaring off the back of record-high oil prices.
So there is good news and bad news depending on who you are and what you do, but what do the numbers say? Again, it's a mixed bag. They're not great, but they're not terrible yet either.
The U.S. Census Bureau's most recent Household Pulse Survey has also found a 32% increase in people relying on loans and credit cards to meet their regular expenses and a 34% increase in those who have had to borrow money from family and friends.
However, with unemployment so low, companies have fewer workers available to fill their vacant positions. The available workers can afford to be more choosy. Usually, this type of supply-and-demand dynamic would mean wages would rise, taking the pressure off households.
A recession isn't guaranteed.
If history teaches us anything, it’s that investing in real estate is one of the best hedges against inflation and helps weather economic downturns like a recession. For example, to stimulate the economy, the feds will loosen monetary policy, resulting in lower mortgage rates, which boosts home sales. For example, in 2001, home prices during the Dot-com recession grew 6.6%, and during the 1980 recession, prices grew by 6.1%.
With the exception of the Great Recession, home values have weathered the storm, either holding steady or increasing in value, as shown in the chart below. If you click on the link below the chart, you can toggle over the interactive graph to track home values through the last eight recessions.
As recessions deepen, one of the tools the Fed uses to stimulate the economy is to lower interest rates. One of the usual effects of lower interest rates when it comes to mortgages is that as mortgage rates go down, buyer activity goes up, thus creating more demand in the market. Typical of more demand without an increase in supply is an upward push in pricing. Therefore, history suggests that purchasing a home during a recession can position you well to capture lower interest rates and purchase price before the demand created by low interest rates pushes prices up further. As you can see, purchasing real estate is a solid long-term investment that can help build lucrative equity. Look no further than South Florida.
Housing Market Still Strong in South Florida
Economic slump or not, South Florida is still one of the most dynamic real-estate markets in the country – and a strong housing market can contribute to helping the country get out of the red.
Our Realtor Thuany Lauria who painstakingly forecast and analyze the local market, note that the downward trend in supply has reversed course with home listings increasing over 30% in the past six weeks – one of the most dramatic shifts they’ve seen. Thuany adds that supply is growing in almost all areas of Delray Beach, Highland Beach and Boca Raton. That means it’s an opportune time to take advantage as an investor and shop the market for income-producing real estate.
Rental properties can help soften the blow in economic recessions because of the passive income they provide (especially as rents continue to rise) and because of long term appreciation. Thuany notes that between April 2021 – 2022, there was an 8.5% increase in investors purchasing properties to turn into rentals. In fact, demand from investors for rentals now represents over 20% of all local home sales. With Palm Beach’s increase in active listings, there’s more opportunity to make investment real estate a reality to build a secure nest egg, no matter which way the economy shifts.
How Will Recession Affect the Housing Market?
According to econofact, eight out of ten recessions since World War II resulted from a downturn in the housing market. With this astonishing statistic, it’s clear for all to see that this sector has a significant say in what path an economy takes.
While we’ve seen what happened during the Great Recession, how will recession affect real estate investors and the housing market at large if it happened today?
Well, we’ve considered this question, and here’s how a recession can affect the current real estate market:
Depreciated Real Estate Prices
As we’ve seen from the Great Recession, a recession happening now will likely result in reduced prices for homes. While this might seem great for people who want to purchase or rent houses for a lower price, a disparity between income and home values might see the recession worsen.
Looking at past events like the COVID-19 outbreak, we can see that most foreign investors have lost the zeal to conquer the US housing market. Nevertheless, with restrictions easing, there might be an uptick of investments on the horizon.
High Demand for Rental Homes
During a recession, most people become anxious, and rightfully so. Due to uncertainty in the air, individuals who had intentions to purchase a home will have reservations due to the income flux. Consequently, rental homes will become the go-to housing medium during this period.
Regardless of the increased rental rates that would define this period, people will prefer these real estate assets due to their cost-effectiveness at the time.
Rent Would Cost More
An offshoot from the previous point, a recession will see rental payments become higher than income. Irrespective of this troubling fact, residents in big cities should be spared from this increment as they’ll be policies in place to mitigate this act.
Despite the thoughtfulness of these policies, landlords will have reservations as the interest rates on loans and mortgages might skyrocket. Thus, it’ll be almost impossible to run the property as a profitable venture.
Real Estate Returns
Investors are churning in their resources to growing regions in preparation for an impending recession. Why? This act is mainly due to the lower home prices prevalent in these regions. As cities grow, there’ll be certain perks to take advantage of, and it’s no surprise that investors are moving “ship” to these places.
When they’ve found their footing in the market, a recession happening will do little to uproot their investments because these areas are a “beehive” for solid investments.
Buying a House During a Full-blown Recession: Is This Advisable?
Since a recession is likely to depreciate the monetary values attached to a home, investing in multifamily properties or any real estate asset of your choice is excellent. Due to foreclosures and people struggling to pay off debt, you can get an amazing and budget-friendly deal in no TIME.
However, due to the varying circumstances entrenched in a recession, buyers’ standpoints might differ. Here, you have to consider your stance carefully as a wrong move can spell doom to your investing endeavors.
Because of this, we’ve decided to curate a list of pros attached to buying a home during a recession:
Advantages of Purchasing a Home During Recession
Buying a home has its positives, including:
Lower Prices
When there’s a full-blown recession, supply is higher than demand. Therefore, homes stay longer on listings.
To make some form of dividends from these properties, buyers usually place lower prices to attract prospective buyers.
Depending on your bargaining prowess, you could still seek lower prices and get a deal of a lifetime without doing anything EXTRA.
Decreased Mortgage Rate
To reduce the brunt of a recession on citizens, the Federal Reserve makes it a point of duty to lower interest rates on mortgages. Albeit a stimulation policy, this results in banks reducing their rates too.
This action lessens mortgage rates also. Consequently, you can pay a lesser mortgage for a home that should’ve cost you more.
Seller Concessions
As we’ve established, recessions are periods where sellers are uncertain. You can use their wavering stance to your advantage. For example, you can make them overlook miscellaneous fees like closing costs when you purchase a property.
Start Your Real Estate Investment Journey with Thuany Lauria & Gallery Estates International Realty
Through past recessions, many real estate investors built and scaled their property portfolio even during the darkest stages of economic downfalls. Many who invested wisely not only emerged unhurt, but they also saw themselves in a stronger financial position than ever before. If you’re unsure where to start, that’s where our knowledgeable Realtor Thuany Lauria comes in.
We’re immersed in one of the most-watched real estate markets in the country. Take advantage of our real-world tips to navigate buying and selling in South Florida and use them to your benefit.
Learn how our strategy and insight can help you make money through all the ups and downs of the market. Recession ahead or not, we’re one phone call away when you need us.