Real Estate Housing Recession
We are currently experiencing a looming real estate recession in this country. Property prices in some areas have started falling in some housing markets, especially those which experience a boom during two years of the pandemic. In late 2022, the Consumer Price Index showed that inflation had slowed for the second month in a row, which was certainly welcome news.
Nonetheless, we expect the Federal Reserve to continue to closely monitor wage growth metrics, which have historically been more difficult to predict, in order to determine how long it should maintain its restrictive stance. With a recession expected to begin in the first quarter of 2023, one plausible scenario is for the Federal Reserve to reduce the federal funds rate in mid-to-late 2023. However, given the Fed's recent statements, we believe there is a significant upside risk to the Fed keeping interest rates higher for longer.
“The wild ride known as the U.S. housing market slowed dramatically in the fall of 2022, as mortgage rates surged and home prices remained high,” said Molly Boesel, principal economist at CoreLogic. “Home sales started off strong in early 2022 but took a nosedive later in the year. On the plus side, generous amounts of home equity will protect many borrowers from experiencing the type of foreclosure activity seen during the Great Recession.”
Home Price Growth Declined Significantly Between Spring and Fall
According to data from CoreLogic’s monthly Home Price Index, U.S. year-over-year home price growth reached 20.1% in April 2022, the highest level recorded in more than two decades. However, appreciation has tapered off every month since, falling to 8.6% in November. Sun Belt states led the nation for annual home price gains for most of the year, most notably Florida, which posted the highest gain in the country from February to November.
This trend partially reflects Americans migrating from more expensive areas in the West to more affordable areas of the country, though price growth in southern states has followed the national trend and slowed in recent months. The year’s spike in interest rates is the primary factor in moderating home price growth, with Freddie Mac data putting 30-year fixed-rate mortgages at 3.22% in early January 2022 compared with a yearly high of 7.08% in mid-November.
Despite the slowdown, a major downturn is unlikely due to a shortage of available homes for sale, strong mortgage underwriting standards, and an unemployment rate that has returned to pre-pandemic levels. The strong home price growth in 2022 led to robust home equity gains across the country for nearly two-thirds of American homeowners with a mortgage.
CoreLogic’s quarterly Home Equity Report shows that in the first quarter of 2022, borrowers gained a collective $3.8 trillion in home equity since the first quarter of 2021, a 32.2% increase. During that period, US homeowners with a mortgage gained an average of $64,000. But since home price growth is the primary driver of equity growth, increases slowed as prices cooled. In the third quarter of 2022, homeowners gained a total of $2.2 trillion in equity than during the same quarter in 2021, an increase of 15.8% and averaging $34,300 per borrower.
What Does Real Estate Housing Recession This Mean for You?
There are several ways to make a real estate recession work in your favor:
- Look for properties that are priced below market value due to the recession.
- Look for motivated sellers who may be more willing to negotiate during a recession.
- Invest in rental properties that can generate cash flow during the recession.
- Look for properties in areas that are not as affected by the recession.
- Consider flipping properties, as a recession can create opportunities for buying low and selling high.
Opportunity! With housing prices dropping and interest rates still near historical lows, this is the perfect time to find good real estate deals and buy cheap.
Your goal should be to find investment opportunities in markets that offer the greatest long-term growth and stability. These are markets that show growth in employment and population.
Target properties that you intend to hold for a short or long period of time. You will gain equity through appreciation as the markets correct and grow over time.
Be sure to only invest in properties that provide a positive cash flow in order to cover all of your operating expenses. This is very important in order to be able to hold the property long enough to benefit from the appreciation that comes over time with real estate.
On the flip side, this is not the perfect time to sell. If you own real estate, it probably makes the most sense to hold onto your investment until the market rebounds. As always, it will. In the meantime, take advantage of the market by either refinancing your own properties for better terms or buying more property that you can rent with a positive cash flow.
During a real estate recession, property values and sales may decline. However, there are ways to potentially make the most out of a recession. One strategy is to look for discounted properties that can be bought at a lower price and potentially sold for a profit later on. Another strategy is to invest in rental properties, as rental demand may remain steady or even increase during a recession.
Additionally, it is a good time to negotiate a better price with a seller as they may be more willing to accept a lower offer during a recession. It is also important to do your due diligence and thoroughly research any potential investments before making a decision.