Navigating the Housing Recession: Trends, Insights, and Strategies

Key Takeaways: 

• Basically, a housing recession occurs when housing market activity decreases over a period, typically six months or longer.

• A housing recession is frequently characterized by a decline in housing starts, building permits, and pending sales for new and existing homes, as well as increasing sales cancellation rates.

• An economic recession will not necessarily spur a housing recession. A housing market downturn can occur independently, no economic recession notwithstanding.

Everyone seems to know when they are in a housing recession, but not everyone knows what such recessions are, what causes them, or even what usually comes after – and that includes some real estate investors. The market tends to be cyclical, after all, so it is best to understand it before it changes again.

To help with that, here is what should be known about navigating the housing recession: trends, insights, and strategies. 

What is a Housing Recession?

Basically, a housing recession occurs when housing market activity decreases over a period, typically six months or longer.

Such a recession is frequently characterized by a decline in housing starts, building permits, and pending sales for new and existing homes, as well as increasing sales cancellation rates.

What are the Main Causes of a Housing Recession?

There are some primary causes of housing recessions, chief among them, rising interest rates. When borrowing becomes substantially more expensive, that usually means higher mortgage payments. In turn, real estate investors and other would-be homebuyers can become less motivated to take out mortgage loans.

As well, developers may postpone building and renovating, leading to declining housing starts and building permits, and the loss of deposits as homebuyers pull out of purchases. However, despite market deterioration, home prices in that scenario may continue to be relatively robust. Part of that is due to high construction costs.

Note that, according to a University of Michigan Consumer Sentiment Index, sentiment from 2021 to last year was reminiscent of the housing decline from the late ‘70s to the early ‘80s, when the Fed sharply increased the federal funds rate.

But because the market is cyclical, a housing recession can follow a housing bubble – a period in which property prices rise significantly. Rising interest rates usually cause prices to cool, subsequently slowing market activity.

Are Housing Recessions Directly Related to Economic Recessions?

No, a straight line may not be drawn between housing recessions and economic recessions. In fact, an economic recession will not necessarily spur a housing recession. A housing market downturn can occur independently, any economic recession notwithstanding. Thus, slumping buying conditions do not always signal an economic recession.

Key Indicators to Look at to Judge the Housing Market

A housing recession’s end is challenging to predict, but there are some key indicators to look for when analyzing the housing market including increases in homebuilding starts and building permits, construction spending, residential construction, and state-level home sales reports.

In general, mortgage rates, new housing starts, and home sales are what drive the real estate market.

What Comes After a Housing Recession?

Like many other facets of investing, the housing market is cyclical. Early signals that the housing market is recovering, particularly following a period of increases, include hikes in home sales, building permits, and housing starts. Such signs are now occurring, generally meaning that it is a good time to buy.

Following a period during which mortgage rates dropped to record lows and home prices rose to new highs, the nation’s housing market finally began cooling late last year. But even as home prices seemed bound for a correction, something unexpected happened: home values began to increase again. According to the most recent Case-Shiller home price index, housing prices have risen for four consecutive months.

Further, for the second quarter of this year, more than half the country’s metro areas reported home price gains. The median home price of $410,200 in June was the second-highest monthly figure ever reported by the National Association of Realtors. The highest number — $413,800 – was recorded last June.

Due to a housing supply shortage, home values have steadied, even though mortgage rates have increased to more than 7 percent. Property bidding wars are back, and inventory levels are relatively low. So, chances are, homebuyers will not see house prices fall. In fact, Zillow forecasts rising prices through to 2024. 

Are We Currently in a Housing Recession?

Investors can be assured that, as of August 2023, the nation is not in a housing recession. In fact, prices are beginning to recover.  

If there is a market correction, housing analysts and economists generally expect a modest one. There are no real expectations of prices falling as they did during the Great Recession.

For one thing, homeowners are personal finances are better overall. The typical U.S. homeowner who has a mortgage has great credit, ample equity, and a fixed-rate mortgage that carries a locked-in rate of well under 5 percent. Consider a recent June Redfin study that shows that 82.4 percent of all existing homeowners have a locked-in rate south of the 5 percent mark.

Homeowners who, a couple of years ago, locked in 3 percent mortgage rates are generally, and unsurprisingly, loathe to sell, especially since current rates are over 7 percent.  This renders the supply of houses for sale even tighter.

Further, homebuilders, who still recall the Great Recession, have been careful about their construction pace, resulting in a continued shortage of available homes for sale.

High-priced regions such as California may be more susceptible to a price downturn, some analysts contend. Still, national prices overall are expected to stay flat.

Here are top reasons why housing economists predict a housing market recessions is not imminent:

• Low inventories. According to the National Association of Realtors, there was a 3.1-month supply of houses for sale in June. Compare that to an anemic 1.7-month supply in early 2022.
• Overbuilding is unlikely. After the last housing recession, skittish homebuilders pulled back and never returned to pre-2007 levels. That means that there is no way now for them to purchase land and gain regulatory approval swiftly enough to decrease demand. Yes, builders and constructing as quickly as they can, but there likely will not be a repeat of 15 years ago.
• Demographic trends. Millennials are entering their buying years, and Hispanics are also generally ramping up homeownership levels. Further, many U.S. homeowners decided during the pandemic – when many people were working from home – that they needed a larger living space.
• Tough lending standards. In 2007, it was common for borrowers to not be required to document their income. That is in the past. Today, the vast majority of those who are approved for a mortgage have excellent credit.
• Growing equity. The millions of foreclosures that flooded the housing market and depressed prices in the period following the housing crash are history, at least for now. Most homeowners have a good amount of equity in their homes, providing them with a comfortable cushion. 

Investing in Real Estate

While no investment is risk free, the benefits of putting capital in real estate are manifold. Its prospective secondary income streams, cash flow, leverage, and tax advantages are some reasons why such investments continue to be popular.

Real estate investors and those interested in breaking into the market may wish to consider the offerings of Yieldstreet, a leading platform for alternative investments – basically assets other than stocks and bonds. With nearly $4 billion invested on the platform to date, Yieldstreet offers more asset classes than anyone else.

Such offerings include real estate – private as well as commercial, including a Growth & Income real estate investment trust (REIT), which lets investors put capital in real estate without possessing the physical property. Generally, REITs are enterprises that own commercial prices including office buildings, hotels, apartment buildings, and retail spaces.

Yieldstreet’s REIT invests equity in commercial real estate in prime, key markets and property types throughout the U.S. Such property types, with entry minimums of just $10,000, include multi-family, industrial, retail, self-storage, as well as hospitality properties.

There is another key benefit to investing in real estate, and that is portfolio diversification – spreading one’s investments both within and among varying asset types. Such diversification, which has become a fundamental, overall investment strategy, can protect against stock market volatility as well as inflation. 

Alternative Assets and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

It is nearly impossible to predict exactly when another housing recession will occur. That can render it difficult for real estate investors to plan. However, a bit of knowledge and insight about such an occurrence can help them make better decisions in the near term and beyond. Investing in real estate can help diversify one’s holdings, which is key to investing success, particularly over the long term.