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The last few months have been a time of transition and uncertainty as the new administration makes sweeping changes. You may wonder how these changes have impacted our local housing market. Let us take a look at where things stand right now. So far, buyer demand is a bit sluggish relative to recent years, but it is on par with showing activity back in 2013, a year when we saw 8% appreciation, so it is solid overall. Click on the graphs to enlarge them:
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It doesn't appear that the news cycle is having a sizable impact on the number of buyers in the market. However, buyer behavior may be affected as they continue to demand significant concessions from sellers even though activity is picking up. For a few lucky sellers each weekend, multiple offers have returned to the market as buyers compete for what they see as the best deals. However, home prices remain broadly stable, and market conditions remain mostly balanced for buyers and sellers.
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So things are ticking along. But there has been talk about an impending recession. The Great Recession was pretty bad for real estate, so should we expect similar things in our next recession? Let's look at the past six recessions to see what we can learn. Here is a chart of Colorado home values dating back to 1975. The gray areas are recessions.
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Yep, the Great Recession wasn't good for real estate. But how about the other 5 recessions? Are you surprised to see green arrows? What's that all about? Let's look into this.
Most of you are probably somewhat familiar with the Federal Reserve's role in managing the economy's "temperature." They don't want it to be too hot because that means inflation tends to go up and prices get out of control (you're probably very familiar with this right now), and they don't want it too cold because growth stalls, businesses struggle, and unemployment tends to go up. The primary method they use to manage this is by controlling interest rates. As a recession begins, spending typically starts to stall out, threatening to weaken the economy, which drives less spending, which weakens the economy further, driving even less spending, and so on, potentially starting a nasty spiral downward. That slower spending usually drives inflation down. As inflation comes down, the Fed responds by dropping interest rates; you've heard this called the "Fed rate," or "overnight lending rate," to lower the cost of lending, which eases the flow of money through the economy to help stimulate spending and growth. As inflation comes down and the Fed rate with it, mortgage rates tend to come down too. An easy general rule to remember is: low inflation = low mortgage rates, high inflation = high mortgage rates. We have seen this play out in the pandemic and post-pandemic world, where we had a short and intense recession, and interest rates came down to historic lows, and then we had a significant spike in inflation and mortgage rates shot up. Here is a graph that goes back to 1975, showing this relationship for the Fed rate in green and mortgage rates in blue through the past six recessions.
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You can see that in each recession, the Fed dropped the Fed rate, and mortgage rates dropped shortly thereafter.
When mortgage rates drop, homes become more affordable, and people find housing more attractive to purchase, increasing demand and high demand tend to drive real estate values up, even in and particularly after a recession.
A bit counterintuitive? Sure. But true nonetheless. So what about the Great Recession? Why was that different? And will the next recession, whenever it comes, look more like that one or the other five?
The recession of 2008 was different than other recessions for real estate. It was primarily driven by the risky subprime loans sold to many borrowers in the early 2000s. In 2010, in recognition of the harm these types of loans caused, the government implemented the Dodd-Frank Act, which put many consumer protections into place and regulated the lending environment much more than before. Since then, the vast majority of loans written on homes have been structured in a way that makes them much less likely to be the cause of a significant financial crisis. The conditions that played a large part in creating the Great Recession no longer exist.
It's fair to point out that very few people saw the Great Recession coming. And there may be some other unidentified culprit lurking in the shadows that brings real estate prices down significantly again. We can never really know until such things happen. Hopefully, having a bit more information about how the system works and how things have happened in the past will help you feel a more informed when making your future real estate decisions. Do you have a real estate question? Don't hesitate to reach out! Until next time- Ken and Allison |
