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What historically happens to Real Estate in an Economic Recession?

We have been hearing about recessions for awhile now, and maybe we are a seeing it first hand in some ways. When people hear the term recession, they often think back to 2008 -2010 when thinking about Real Estate. That was an outlier of a recession when it comes to Real Estate. Recently I was reading an article from KeepingCurrentMatters and found a good amount of useful info about the previous recessions and how they correlated to the Housing Market.

As I have mentioned in many past conversations with clients or Real Estate Investors, the current Real Estate Market is vastly different than the Market of 2008. This will lead to vastly different results brought on by a recession as well. In 2008 a lot of lender practices were very loose and lending requirements were very flexible. People with lower credit scores and higher debt to income ratios were allowed to get loans which meant there was a higher risk associated with those loans and they were more likely to default on those loans. Lessons were learned from that time frame and the lenders have been much more strict on credit scores and debt to income ratios since. The results are that the loans are lower risk and should be much more likely to survive a recession without a default. With fewer homes being defaulted on, there will be fewer that the banks are selling on the Real Estate Market. With the market not being flooded by foreclosures, the supply and demand can stay in line with one another more easily. This means prices should not drop as they did before.

Another key item to remember is that before in 2008 there were a lot of builders building "Spec Homes". A spec home is a home that they speculate they will sell when done. They were not building for a specific buyer who had already been in contract with them to have it built for a certain price and paid any type of deposit. Instead they were building and planning to find a buyer when they were all done. A lot of builders lost out and were hurt by the 2008 recession. The lesson was learned then to not over build the supply that was needed. Many builders just got out of building spec homes completely or changed career paths after the recession. Since then, new homes have been underbuilt to avoid risk. This along with many millennials deciding to start purchasing was one fundamental that had contributed to the housing price increase and bidding wars in 2020 through 2022.

The article gave graphs that showed how during the most recent previous six economic recessions, Real Estate prices decreased in two of the recessions. It did not decrease during the other four. In addition to this, they did show that during the previous six recessions, each time the mortgage rates did decrease as the federal reserve lowered interest rates to stimulate the economy and get people buying again. That allowed lenders to offer lower rates and things started to pick up overall.

In short, the fundamentals are in favor of the housing market values not decreasing as they did during the 2008 recession that many people remember today. I hope this was helpful. Check out some of our other blogs for more useful content.


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