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.
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.
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.
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.
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.
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.
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:
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 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.
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.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.