2008 notwithstanding, home is usually a good place to be in a recession.
The strong start to the 2020 real estate market was an encouraging sign for area homeowners. Then COVID-19 hit, and suddenly life is on hold for millions of Americans. Naturally, that raises questions about the long-term prospects for housing and homeownership.
But when it comes to real estate, many experts are looking at this soon-to-be-official recession differently than the last one. Here’s a look at why the housing market may very well make a strong recovery and even be a driver of future economic growth.
Housing Stands Up To Recessions
Housing’s role and impact in the 2008 financial crisis was so significant it’s hard to write it off as an anomaly. But that’s exactly what it was in terms of home prices. In fact, according to the CoreLogic Home Price Index, in three of the four recessions prior to 2008 national home prices actually rose – by 6.1% in 1980, 3.5% in 1981 and 6.6% in 2001. The only other time the HPI fell was 1991, when it declined by just 1.9%, and even then, five out of nine U.S. regions posted gains.
In an April 1 blog post, CoreLogic senior leader of science and analytics, Bin He, noted that the Fed’s quick action in response to COVID-19 is reminiscent of steps it took after the dot-com bubble of 2001. “With the Fed’s cutting the rate to zero and huge injection of liquidity, the home price path could be like what happened in 2001, but it’s too early to speculate given the uncertainty about the length and severity of the pandemic,” He wrote.
The 2008 recession was set off by an overheated housing market in which homebuyers were significantly overleveraged and underqualified. Many buyers were able to obtain mortgages despite bad credit, and some banks even loaned more than 100% of a home’s purchase price. On top of that, owners were borrowing heavily against their residences, using home equity to pay for new cars, vacations and even additional houses.
By contrast, home equity has never been higher in America than it is right now. The record $6.3 trillion worth of home equity that Americans have today is more than double the 2009 level. And that’s with homeownership rates that are lower now than they were back then and with price growth that has been slow in many markets including metro Chicago.
Bottom line: both the national and local housing markets are much more stable than they were in 2008.
Stimulus On Steroids
In February 2009, more than six months after the Great Recession had begun, Congress finally passed the American Recovery and Reinvestment Act (ARRA). In addition to tax cuts for most taxpayers, the bill included a one-time payment of $250 to recipients of Social Security, Supplemental Security Income, railroad retirees, and veterans.
By contrast, the $2.2 trillion CARES Act was enacted almost immediately upon understanding the potential economic impact of COVID-19. Today’s stimulus delivers more aid, more quickly, to more people, with additional assistance now in the works.
The general consensus among today’s policymakers is that the Fed wasn’t aggressive enough in helping businesses and individuals weather and recover from the last recession. This time around, the Fed has said its ability to keep credit flowing is virtually unlimited, and that it will take a whatever-is-needed approach to supporting the economy. That goes for housing too.
To say there was high supply and low demand for homes a decade ago would be an understatement. In fact, according to the Federal Reserve of St. Louis, in January 2009 there was a 12.2 Months’ Supply of Inventory (MSI) in the market. Granted, the economy was in recession by then, but even two years earlier, when real estate was rocking, MSI topped 7 months thanks to torrid new-home construction. Today, the opposite conditions prevail. MSI was at 4.8 months in January 2020, and actual supply hit a record low in February.
That was heading into the pandemic, but what will demand look like coming out of it?
On the one hand, economic hardship will certainly take some potential homebuyers out of the market, but many other Americans are gaining a newfound appreciation for a place to call their own…perhaps one with an extra bedroom that can double as a home office or getaway space. Whereas “home” was a four-letter word back in 2008, today it’s something for which many Americans are grateful, and to which many others aspire. Which is to say that demand will be quite strong for some time to come.
It’s easy to draw connections between crises as serious as the 2008 recession and the current COVID -19 pandemic. However, when it comes to the housing market, these two moments in time are in fact quite different.
Written by @properties
As the COVID-19 crisis continues to evolve, volatility and uncertainty have swept through the financial markets.
Borrowers saw wild swings in interest rates over the last few weeks and were left to wonder whether they could still qualify for specific loan amounts and close on pending transactions.
Amidst the chaos, Guaranteed Rate has been a steady ship in rough waters. We asked them to answer a few questions pertaining to the impacts market volatility has had on the mortgage industry, and they responded with some helpful guidance. Read, share, enjoy and contact your trusted Guaranteed Rate loan officer with any questions.
@home: First of all, what happened with interest rates last month?
GR: Rates came down at the end of February creating a big refinance boom. Combine this with Spring homebuying activity that was already well ahead of last year’s pace and lenders nationally were dealing with huge pipelines of business. Enter COVID-19.
Increasing unease over the economic effects from the novel coronavirus spread forced The Federal Reserve to make significant moves in March. All these factors have led to extreme volatility in the secondary mortgage market. The lasting impact of COVID-19 and its impact on the economy forced the Fed to slash Fed Funds rates to zero. The expectation was mortgage rates would fall in response to the Fed’s activities, but they initially did the opposite. Whether this was due to concern the impact of the COVID-19 was more significant than originally feared, because financial insiders saw the Federal Reserve measure was a short-term fix, or other factors is uncertain. As a result, rates shot up amid a bond sell-off, and we saw national 30-year fixed rates jump from the low 3% range to the mid 4%’s range.
More recently on March 23rd the Fed announced their most aggressive market intervention to date. The new move represented an open-ended commitment to the Quantitative Easing program. This longer-term commitment allowed for rates to move closer to anticipated lower levels in the mid-3% range.
Without question, health and economic concerns have led to extreme market fluctuations. As this continues, the markets will continue to rise and fall due to a vast range of factors. What’s important is rates are historically low based on almost all standards, making it a great time to refinance, or purchase a home.
To learn more, our blog post provides a deeper explanation.
@home: So, can homebuyers get a mortgage now?
GR: The answer is yes. While our employees may be working remotely (to ensure social distancing), we are absolutely open for business. Through our proprietary technology, originally developed in 2015, we’re equipped to operate home loans end-to-end with almost no physical human contact. From digital mortgage applications to loan approvals to “No-Contact Appraisals℠”, and even hybrid or e-closings via our FlashCloseSM* platform whenever possible – we’re getting it done.
There is a functioning mortgage market that allows for homebuyers to get financing for their new home, and our loan officers are here to help them. To watch how we’re ensuring social distancing through digital mortgage tools, click here.
@home: How has this crisis changed the process of obtaining a mortgage?
GR: The mortgage industry has traditionally been recognized as “behind the times”, technologically speaking. However, Guaranteed Rate has been at the forefront of fintech evolution for years now – launching the first digital mortgage in 2015. Our key focus remains implementing tools that ensure the best possible experience for our customers, whether we are in crisis mode or not.
So, from a process standpoint, there really hasn’t been a major change for how we do business, aside from not being able to meet in person. Applications, approvals, underwriting, appraisals and closing – it’s all handled electronically whenever possible. As a local firm, we love to meet our clients face-to-face, but it’s not a necessary step in getting a loan – plus, there’s always FaceTime! We’re as prepared to handle this situation as any industry. We feel fortunate to be able to keep mortgage approvals and fundings moving.
@home: Back to rates. What advice would you give borrowers about when to lock in an interest rate?
GR: This is important. Based on recent market volatility, borrowers can expect rates to fluctuate from the time they get pre-approved, to the time they’re under contract, to the time they lock. We’ve seen that there are any number of factors that can drive rates up or down, and they don’t always behave predictably, especially in times like these. So, the advice we would give borrowers any time but especially now is don’t try to time the market. If you like your rate – and there’s a lot to like about rates right now – lock it in.
@home: Do buyers need a pre-approval?
GR: A pre-approval is absolutely essential. First of all, any seller in today’s market is going to insist that a buyer walking into their home at least has the wherewithal to make the purchase. Second, because of rate volatility, buyers should be approved for a loan amount within a range of interest rates. A preapproval shows the seller that you are a very serious buyer and assures them that no matter what the market conditions the borrower can still qualify and close.
And all of this brings us to another point, which is that it has never been more important to work with a mortgage lender who is in constant communication with the borrower and their real estate agent, and who can actually deliver what and when they say they’re going to deliver. It’s not just about interest rates. It’s about meeting deadlines, being able to deal with any issues that come up and ultimately making sure the homeowner closes on their home. On top of all this, we want to ensure all parties experience a successful transaction in a safe and healthy environment.
Have more questions? To speak with a trusted Guaranteed Rate loan officer near you, click here.
Guaranteed Rate Disclaimers:
- *FlashClose eClose is not eligible in all states and is not eligible for all loan types or investors. Conventional loans only. Eligible for primary, 2nd home and investment properties. Title company restrictions may apply.
- Residential mortgages are packaged together and sold to investors as mortgage backed securities. This is known as the secondary mortgage market.
- Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information.
- All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
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