Unless you’ve been on a “cut the cord” vacation, you’ve seen last week’s headlines warning that an inversion in the bond market has folks worried we’ll be entering a recession soon. About a third of economists think we’re likely on that road. Remembering the Great Recession, should we shun the real estate market?
As the New York Times points out, the last two big recessions occurred because something was in a bubble. In the early 2000s, it was the tech bubble and resulting crash made worse by September 11. The Great Recession began in the housing market that exposed shady lending and rippled into the global financial crisis.
At the moment there is no similar bubble out there. There are trade wars and tariffs. There are diplomacy stand-offs and a global rise in nationalism and populism that are fraying the stability of historic global ties. These governmental policy issues largely affect the business world and cause uncertainty which leads to conservative spending. Consumer spending is still chugging along fine.
But let’s say that business decides to pullback in a real way which starts the domino effect of lost jobs, lower wages that then do impact consumer spending (two-thirds of spending). Then we may see real estate prices impacted.
But again, learn from history.
A Dearth of Housing Starts
If there is a pullback in consumer confidence that affects home buying and renting, that in turn will crimp development (not as severely as the housing-led Great Recession). So a recession might lower prices as supply grows (should you wait, probably not) but then what?
The Great Recession has resulted in over a decade of NOT building enough housing units to satisfy population growth and normal household formation rates (moving out of the basement). Historically, that rate has been between 1.5 and 1.6 million housing units annually. Believe it or not, as the chart above vividly shows, we have still not even begun to fill the hole created by 13 years (and counting) of below breakeven building rates. In 2018, US housing starts were 1.25 million – that’s 300,000 or 20 percent fewer homes than breakeven! If a recession hurts housing construction, it’ll put the nation even further behind in housing construction (tightening supply) when it’s over.
When supply is low and demand high, prices go up. During the Great Recession, we all wondered if underwater mortgages would ever recover. Of course they did, often with a vengeance.
What Was Built?
The other problem with housing starts is the mix of housing that has been built. In 2000, 78 percent of all housing starts were single-family, but by 2018 that had shrunk to 70 percent. Similarly, the number of smaller multi-family – two to four units – has dropped in half to just 1.11 percent of total housing starts. This is problematic for the same reason chain stores killed the mom-and-pop stores – regardless of whether those du- and quad-plexes were rental or condo/townhouse, the shrinkage takes smaller builder/landlord investors out of the market while concentrating control with a few large ones. Those “few” build in the larger multi-family segment, where construction rose from 19 percent of all new construction to 28.8 percent.
We know that post-Great Recession, there has been an apartment boom as a weak recovery, stagnant wages and shameful amounts of student loan debt drove a generation to postpone home buying in favor of renting. So that rise in larger multi-family projects has been overwhelmingly rentals versus condos.
Because single-family is such a huge proportion of overall housing starts, its ebb and flow mirrors the overall chart above. The same cannot be said of small multi-family developments, which dropped off a cliff in 2007 and, 13 years later, have never recovered.
So if there is a recession that affects the national housing market, coming out of it will leave us with even fewer purchasable homes as a percentage – further driving up prices.
Dallas Isn’t The Nation – It’s Worse
The main reason Dallas has an affordability problem today is that during the aforementioned 13 years, neither the nation nor Dallas was building enough housing for its needs. The double-whammy is that Dallas is becoming a magnet for migration from around the U.S. Think of this as an era where we were only buying shoes for two of our three kids – only to have the wife announce she was having triplets. Since only two kids could leave the house with shoes on, shoes became a very hot commodity.
Yes, I know you see construction cranes everywhere and think we’ve overbuilt. We haven’t. There’s some argument to be made that we’ve overbuilt luxury rentals, but overall housing units, no. If rents dropped by a third in these new swish buildings, there’d be a line around the block to get into them. (No, I’m not saying a recession would drive down prices by a third. I’m saying that were there more units on the market at more reasonable prices, they would be immediately rented – or bought, were they condos. There is pent-up demand.)
So Should You Buy (or Keep Buying)?
I think mostly, yes. First of all, a new recession won’t be driven by an overheated housing market. As much as the chart above looks like a bubble, it’s a supply issue, not loosey-goosey bank lending (it’s essentially the inverse of housing starts). And because supply is an issue now, before any recession, prices would quickly rise as we emerged.
It’s important to keep in mind that builders — and especially banks — do not build for the future. They build for the present and the past. Construction is also not an instant-gratification industry. It takes time to get everything going again – heck, we’re over 10 years post-Great Recession and we’re only now building 80 percent of what we need to tread water. The Great Recession also chased away a lot of construction workers who never returned. Recent immigration policies are chasing away even more. Low supply, higher wages, and higher construction costs bring higher prices.
Why Should You Wait?
Buying a house typically puts you in a temporarily precarious financial position – down payments, new furniture, renovations, etc.. It takes time to rebuild a financial cushion – especially if it’s the first home. If income interruption is a fear, wait.
Timing a Recession
Talk about a fools’ errand. We can’t time its beginning, depth or end nor what industries will be hurt hardest. We can’t even know the local effects. Look at the 2001 tech-bubble recession (left grey bar). In Dallas, prices rose. Besides, if a home is something you’d be keeping for five to 10 years, any dip will recover in that time. And given the state of housing supplies, I bet quicker.
Finally, if you’re already on the property ladder, moving up (responsibly) doesn’t expose you much anyway. If your current home is worth $250,000 and you trade up to a $300,000 house and then a recession dropped prices 10 percent, a $250,000 house would drop $25,000 while a $300,000 house drops $30,000 – a $5,000 delta. First-time buyers are more exposed because they have no equity, and so everything would be a loss and harder to weather (and stomach).
In the end, I began last week more concerned than I was by the end – once I did a little research and got behind the headlines and fearmongering.
Remember: High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards. Have a story to tell or a marriage proposal to make? Shoot me an email firstname.lastname@example.org. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.