What To Do When The Real Estate Market Collapses (Again)
According to recent studies.. 58% of Americans believe the real estate market is heading for a collapse within the next 18 months.. What does this mean for the real estate investor and Realtor? After 23 years in real estate, and having survived two market corrections, I can give you some key insights on what you can do to insulate yourself, as well as protect your business from the coming storm.
What follows is excerpts from articles that I discovered from trusted sources on the internet. Where possible, I’ve left links to the individual articles so that you can do your own individual research.
In this podcast, I will make the case of the upcoming real estate market collapse, and concrete steps that you can implement to help your business thrive!
Recessions and falling home prices are not really new concepts. Housing prices took a 24 percent nosedive during the Great Depression of 1929. In hindsight, that housing recession was not really a good time to buy real estate in the short term because that particular recession lasted 10 years.
All other recessions since 1929 lasted a period of two years or less. Many of those recessions shared falling stock prices, high-interest rates, high unemployment rates, and a loss of consumer confidence, along with one other common trait: They were all good times to buy real estate.
People who were caught in the 2008 crash are spooked that a 2018 bubble will lead to another crash. But that crash was caused by forces that are no longer present. Credit default swaps insured derivatives such as mortgage-backed securities. Hedge fund managers created a huge demand for these supposedly risk-free securities. That created demand for the mortgages that backed them.
As many unqualified buyers entered the market, demand soared. Many people bought homes as investments to sell as prices kept rising. They exhibited irrational exuberance, a hallmark of any asset bubble.
In 2006, homebuilders finally caught up with demand. When supply outpaced demand, housing prices started to fall. That burst the asset bubble.
In September 2006, the National Association of Realtors reported that home prices had fallen for the first time in 11 years. Inventory was high, providing a 7.5 month supply. In November, the Commerce Department revealed new home permits were 28% lower than in 2005.
But the Federal Reserve ignored these warnings. It thought the economy was strong enough to pull housing out of its slump. It pointed to strong employment, low inflation, and increased consumer spending. It also promised to lower interest rates. That would give the economy enough liquidity to fuel growth.
The Fed underestimated the size and impact of the mortgage-backed securities market. Banks had hired "quant jocks" to create these new securities. They wrote computer programs that sorted packages of mortgages into high-risk and low-risk bundles. The high-risk bundles paid more but were more likely to default. The low-risk bundles were safer but paid less.
The ticking time bomb was the millions of interest-only loans. These allowed borrowers to get lower monthly payments. But these mortgage rates reset at a higher level after three years. Many of these homeowners could not pay the mortgage. Then housing prices fell and they couldn't sell their homes for a profit. As a result, they defaulted.
When times were good, it didn't matter. Everyone bought the high-risk bundles because they gave a higher return. As the housing market declined, everyone knew that the products were losing value. Since no one understood them, the resale value of these derivatives was unclear.
Last but not least, many of the purchasers of these MBS were not just other banks. They were individual investors, pension funds, and hedge funds. That spread the risk throughout the economy. Hedge funds used these derivatives as collateral to borrow money. That created higher returns in a bull market, but magnified the impact of any downturn. The Securities and Exchange Commission did not regulate hedge funds, so no one knew how much of it was going on.
The Fed didn't realize a collapse was brewing until March 2007. It realized that hedge fund housing losses could threaten the economy. Throughout the summer, banks became unwilling to lend to each other. They were afraid that they would receive bad MBS in return. Bankers didn't know how much bad debt they had on their books. No one wanted to admit it. If they did, then their credit rating would be lowered. Then, their stock price would fall, and they would be unable to raise more funds to stay in business.
The stock market see-sawed throughout the summer, as market-watchers tried to figure out how bad things were.
By August, credit had become so tight that the Fed loaned banks $75 billion. It wanted to restore liquidity long enough for the banks to write down their losses and get back to the business of lending money. Instead, banks stopped lending to almost everybody.
The downward spiral was underway. As banks cut back on mortgages, housing prices fell further. That sent more borrowers into default, which increased the bad loans on banks' books. That made the banks lend even less.
According to research conducted by Zillow and published in a report on Jul. 25, 2019
The longest uninterrupted economic expansion in U.S. history will probably end with a recession in 2020, according to a panel of more than 100 experts. Trade policy, a stock market correction and a geopolitical crisis were cited as the most likely triggers for the next economic reversal.
The current expansion recently broke the previous record-long streak of 120 months, set between 1991 and 2001. If the currently hot U.S. economy does slide into a recession next year, it will be doing so amidst softening home buying demand that is expected to be lower in a year than it is now.
The Q2 2019 Zillow Home Price Expectations survey, sponsored by Zillow and conducted quarterly by Pulsenomics, asked more than 100 real estate experts, economists and strategists for their views on the timing of the next recession and the evolution of home buying demand this year and next. Among those with an opinion, exactly half (50%) said they expected the next recession to begin at some point in 2020, with another 35% saying they expected the current expansion to end in 2021.
Almost one in five panelists (19%) said the next recession would begin in Q3 2020, the most popular quarterly choice, and 9% said the next recession was most likely in Q3 or Q4 of this year. Just 1% of those with an opinion said they expected the next recession would not begin until 2023, with another 1% saying it would happen after 2023.
The expected timing of the next recession was largely in line with expectations this panel expressed around the same time last year, when 48% of panelists said they expected the next recession to begin in 2020.
Panelists were asked to choose and rank up to three economic and/or political factors likely to trigger the next recession, from a list of 10. Trade policy, a geopolitical crisis and a stock market correction were the most commonly chosen factors, respectively. A housing slowdown was among the factors rated as least likely to cause the next recession, chosen by just one in eight (12.6%) panelists that offered an opinion.
But while panelists largely indicated a housing slowdown was unlikely to cause the next recession, the housing market will surely be affected by more sluggish economic conditions. A small majority (51%) of those experts with an opinion said they expect home buying demand in 2020 – when they say a recession is most likely to occur – to be somewhat or significantly lower than in 2019. About a third (32%) said they expected home buying demand to be about the same in 2020 as in 2019.
More immediately, almost three quarters of respondents (73%) said they expected home buying demand this year to be about the same or lower than last year. Home sales have been sluggish to start 2019 compared to the beginning of 2018, despite conditions that are more favorable for buyers now than they have been in quite some time.
Put together, signs of already fading demand and the possibility of an impending recession are also very likely to contribute to further slowdowns in overall U.S. home value appreciation going forward.
Currently (April 2019), U.S. median home values are growing at a 6.1 percent annual pace – strong by historic standards, but well below annual appreciation rates of 8.1 percent recorded as recently as December. Annual home value growth has slowed in each of the past four months compared to the month prior, and panelists said they expect this slowdown to continue.
Panelists were asked for their opinions on the pace of home value growth over the next five years. On average, panelists said they expect annual growth at the end of 2019 to be 4.1 percent, slowing further to 2.8 percent in 2020 and 2.5 percent in 2021 before picking up somewhat in 2022 and 2023 (to 3 percent and 3.4 percent, respectively).
Most Americans are concerned that the real estate market is going to crash. A recent survey found that 58% agreed that there would be a "housing bubble and price correction" by 2020. As a result, 83% of them believe it's a good time to sell.
There are many differences between the housing market in 2005 and the current market. In 2005, subprime loans totaled more than $620 billion and made up 20% of the mortgage market. In 2015, they totaled $56 billion and comprised 5% of the market.
There are plenty of signs that the housing market has been in bubble territory. Most crashes occur only because an asset bubble has popped.
New home sales have fallen 22% between November 2017 and September 2018. Resales fell 10% during that period. The last time this happened was in 2005.
The difference is that home prices haven't fallen. Instead, they've gradually slowed their increase. Many home sellers are disappointed they can't get the same high prices their neighbors got a year earlier. They are reluctant to lower their prices, and so sales have slowed.
One reason for the slowdown is because average incomes haven't kept up with home prices. Per capita income rose 25% between 2011 and 2018. Home prices rose 48% during that period.
Despite slowing sales, homebuilders continue to request more new home permits. In 2017, they were granted 1.3 million permits, according to the U.S. Census. That's lower than the average number in the 1990s.
But it's 6.2% higher than in 2016. That's less of an increase than in 2015 when they received 12.4% more permits. This increase is higher than in the years preceding the financial crisis. Between 2001 and 2005, permits increased just 8% per year on average.
They went wild in 2012 when they got 33% more permits than the prior year. They received 19% more permits in 2013. But they were making up for severe losses incurred during the crash. Housing permits fell from 1.4 million in 2007 to only 583,000 in 2009, a 58% decline.
On the whole, builders have not oversaturated the market like they did before the financial crisis. As a result, it's likely home prices will not fall like they did during the crash.
When prices fall, the question is not really how low can they go? The question is how much real estate can you buy before prices go back up. If you are buying a home during a housing recession, getting a good price is just as important as being able to hold and ride out the housing recession.
Not every home you spot for sale will be a good buy. Some might require extensive repairs or be located in the wrong neighborhood. The key to buying a home is and always will be location, location, location—followed by conditions.
Here are precautionary tips for home buyers in a housing recession.
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