Why this Recession is Different than the Last
Not all recessions are created equal. While the real estate market took a sharp downturn during the Great Recession, history tells us that real estate is not always impacted by a recession. The fundamentals of the current real estate market support continued growth, even if there is a brief leveling.
Here are some reasons why this recession is different than the Great Recession:
- 1. Stricter Banking Practices
Unlike the Great Recession, there are stricter underwriting practices and higher loan qualifications. Banks are less willing to finance loans at higher loan-to-value ratio, meaning that borrowers must bring more funds to the table as a down payment. This results in, generally speaking, more qualified borrowers and a loan with a better loan-to-value ratio that is less likely to default. Finally, some of the adjustable rate loan products that were prevalent during the Great Recession are no longer available.
- 2. Inflation
Approximately 40% of the money that has ever been printed has been printed since 2020. With this dramatic increase in capital available to consumers, it is unlikely that the price of real estate will decrease. As the prices of everything, from gas and consumer goods, rises, it is unlikely that real estate will go in the opposite direction.
- 3. Supply & Demand
There is little supply of real estate and intense demand, unlike the Great Recession. The amount of new construction projects has greatly decreased since 2020, leaving the market under-supplied. Further, there were blanket federal and state foreclosure moratoriums in 2020 and 2021, and the court system has not caught up, meaning that foreclosures that would usually hit the market, have not hit, and are not imminently hitting, the market.
As for demand, consumers are moving more than before because they have increased flexibility to “work from anywhere” and are thus choosing warmer and more business friendly climates. Moreover, since the Great Recession, REITs are buying more classes of real estate, including single-family residential real estate. REITS are finding it hard to find yield in other asset classes, and now picking on a lower hanging fruit in the residential market
- 4. Residential Buyers Have More Equity Now than Before
For many reasons, buyers are putting more money towards a real estate down payment than they did before the Great Recession. As mentioned above, banks are requiring better loan-to-value ratios.
Additionally, buyers must offer a higher down payment because of the competitive market in the past few years. Buyers are able to make a higher down payment because of inflation, as mentioned above, and because there was great appreciation in the real estate market in the past 10 years, and particularly since 2020. If a buyer purchased real estate in the past 10 years, it is likely worth more now, so an individual can sell a property for a substantial profit and use that profit towards a new down payment.
Take this example: an individual in California has $800,000 in profit after selling his/her primary residence, is seeking to move to a larger home (with more property) in Phoenix because their tech career now supports “work from anywhere.” That Phoenix home may be listed for $600,000, and this California buyer does not necessarily “care” if they “overpay” and offer $75,000 over asking price because they are able use half of their $800,000 profits as a down payment. Taking into account the large down payment and recent low interest rates, that buyer may have dramatically decreased their living expense. This was not a common scenario during the Great Recession, and an important distinguishing factor nowadays.
- 5. Low Interest Rates
For about two years, borrowers enjoyed historically low interest rates. This means that their housing payment is lower. Borrowers with lower loan payments tend to default less.
These important differences, and the fundamentals of the real estate market, demonstrate that we may not feel a real estate crash the way we did 15 years ago. What are some other ways that this recession is different than the Great Recession?