Homeownership and Recession
A housing crisis is not the same as a recession. The only thing that every homeowner in today’s market has to know is that. Experts are sounding the recession alarm everywhere you turn, but even if this were to be the case, a slowdown in the economy wouldn’t always indicate a decline in the value of properties.
Take a look at the historical data to demonstrate that home prices don’t always decrease during recessions. Over the past four decades, this nation has experienced six recessions. According to the graph below, property prices increased four times and decreased only twice during the recessions that date all the way back to the 1980s. Therefore, historical evidence shows that home values don’t decline or drop as the economy slows down.
The early 1990s marked the first time on the graph that home values declined, with a decrease of less than 2% in housing prices. It happened once more in 2008 during the housing crisis, when property values fell by about 20%. The majority of Americans believe that if we enter a recession, we will experience a replay of the 2008 housing catastrophe. This property market, however, is not a bubble that will soon explode. Today’s principles are considerably different from those of 2008. Therefore, we shouldn’t assume that we are going in the same direction.
What Caused the Crash 15 years ago?
Foreclosures inundated the market in 2006. Home values were substantially reduced as a result. There were two primary causes of the foreclosure wave:
- Many buyers weren’t actually eligible for the mortgages they were granted, which increased the number of foreclosures on homes.
- Many homeowners tapped into the equity of their properties. They got into a scenario where they were underwater when prices fell (where the home was worth less than the mortgage on the house). Many of these homeowners abandoned their properties, which increased the number of foreclosures. This further decreased the property values in the area.
What’s Different Now?
Tere are two reasons today’s market is nothing like the one we experienced 15 years ago.
Demand for Homeownership is Real
Up until 2006, banks were inflating demand by decreasing lending requirements and making it simple for almost anyone to be approved for a home loan or refinance their existing home. Mortgage companies now have significantly tougher requirements for home buyers and refinancers.
People Are Not Using Their Homes as ATMs
Many people believed that the price rise that began in the early 2000s would never stop. They started taking out loans against the value of their homes to pay for new vehicles, boats, and trips. Many of these homeowners were underwater when prices began to decline, which caused some of them to abandon their properties. As a result, there were more foreclosures.
We’re not in a recession in this country, but if one is coming, it doesn’t mean homes will lose value. History proves a recession doesn’t equal a housing crisis. Contact me today if you want to know more about the current market.