Photo by Gerd Altmann via Pixabay
Many economic experts are predicting a recession in 2020, and some people fear a housing collapse might come with it, similar to the one we experienced in 2008. Are we in a housing bubble? Is now a bad time to buy and a good time to sell?
What Happened Last Time
In the Great Recession that started in 2008, housing led the crash and housing suffered from it. Mortgages were way too easy to get, and banks extended credit to people who had little realistic chance to repay. Banks were willing to write these mortgages because they could offload their risk by reselling them to institutions that bundled them and sold the bundles as mortgage-backed securities. Mortgage-backed became hot, and banks wrote even more mortgages to fill the demand. Credit standards fell. Prices soared. Developers built like crazy. Appraisers overvalued houses and buyers took on mortgages for more than property was really worth. The inevitable day came when homeowners couldn’t keep up payments and the entire house of cards collapsed. Foreclosures flooded the market and it took years to stabilize.
Will It Happen Again?
After the 2008 debacle, banks got a lot more serious about evaluating potential borrowers. New regulations required lenders to maintain adequate levels of capital and liquidity. Although there has been some relaxation in both arenas, there’s not the “wild west” atmosphere that existed in the 00’s.
Home prices have risen steadily for eight years, and some experts think houses are overvalued. Overall, the US economy has been expanding for 10 years. That’s the longest stretch of growth in the nation’s history. At some point it’s going to end. Many experts think that will happen in 2020, while others argue that the bull economy has enough steam to go a few more years. It there is a recession, housing will suffer to some degree.
However, conditions in the housing market are different from 2008. Housing inventory is not overbuilt; if anything, there is a shortage of new units, especially at the entry levels. Few homeowners are saddled with unrealistic mortgages. Home costs are higher than their 2008 peak in only some markets. In a lot of the country price increases have been moderating.
What’s Likely to Come Next?
Prognosticators have been wrong before and will be wrong again, but here a few of the possibilities:
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There’s a good chance home prices will be mixed by region but overall will increase modestly for another year.
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A recession is possible for 2020 and likely within the next few years, and when it comes it will bring about in a pullback in the housing market.
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The next economic downturn will not be caused by housing, and housing will not be the segment of the economy most severely affected.
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The next housing slump will be a slump and not a crash anything close to that of 2008.
One can argue whether investors are too optimistic about the future of housing, but there isn’t the irrational exuberance that accompanied the bubble of 2008. The housing market is often susceptible to a downturn, but the “perfect storm” of conditions that produced the 2008 debacle doesn’t exist.
