InvestorsProperty Owners

Investors Circle: How Will the Next Recession Impact the Housing Market

A recession is defined as a period of at least two consecutive quarters in which the economy is in decline, but, as the National Bureau of Economic Activity notes, many factors can come into play, including Gross Domestic Product, Gross Domestic Income and the depth of economic activity decline. Therefore, recessions don’t always involve two consecutive quarters of decline. As economic activity slows, both businesses and consumers cut back, causing the contraction to spiral.

Financial experts have differing opinions on what could trigger the next recession. While the housing bubble drove the last recession, lending has remained fairly conservative over this economic recovery and other factors may be more likely to trigger the next downturn.

Recessions have had varying effects on the housing market. The economic downturn of 2001 caused little disruption in home sales nationally, though they had a significant effect in some of the most exposed regional markets. On the other hand, the recession of 2008 touched nearly all regions across the nation. Housing prices plummeted and the number of transactions dropped by half of what they had been before the downturn. So how will this next recession impact the housing market this time?  Here are some factors to consider.

  1. Demand for low rentals will remain steady due to shortage of starter homes and anxiety of economic downturns-  A recession on the horizon raises a lot of anxiety for prospective homebuyers: Will they be able to afford their mortgage payments if their income decreases or stagnates? If home value growth slows in their area, will their home gain sufficient value by the time they’re ready to put it on the market? This uncertainty leads many to put off buying a home during a recession, keeping younger residents in the rental market longer, and raising renting as a new possibility for families and older residents who might otherwise own their homes.
  2. Rent Control– Rent control has been a third-rail topic of debate within the rental market this year. With the housing shortage showing no signs of abating, we believe that policies aimed at addressing rental affordability will be on the table in cities across the U.S. in 2020, as they have been in California, New York, and Oregon over the last year.  The potential for rent control policies to be implemented in major cities is a major source of anxiety for those in the rental sector. In a time of persistently low cap rates, rental owners worry that having their ability restricted to raise rents in parallel with rising costs means they won’t be able to afford to maintain their properties’ profitability and finance capital improvement projects. Property managers fear that these changes will damage the appeal of rental property investment. In addition, today’s property managers face the challenge of balancing the profitability of their clients’ investments with rent prices that keep units filled with qualified residents.
  3. Real Estate Investors will have greater returns– Over the last several years, real estate investors hunting for higher cap rates and lower prices have focused their attention on fast-growing cities away from the coasts. Between July 2017 and July 2018, the U.S. cities that gained the most residents from domestic migration were Phoenix, Dallas, and Las Vegas; while New York City, Los Angeles, and Chicago actually shrank.  Why is this the case? Since 2016, population growth in certain mid-sized cities has outpaced growth in powerhouse cities long considered cornerstones of the U.S. real estate market. These thriving secondary markets have certain characteristics in common: They have strong job growth that’s not restricted to a single industry, which helps cities to weather a recession; and often includes an emerging tech sector that attracts young, educated professionals. Though home and rent prices show robust growth, the cost of living stays affordable for the average resident because the supply of housing is less constrained than in primary markets. Workers, families, and businesses take notice of this growth and start moving in.

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