As recessionary fears grow, so do homeowner’s concerns about their homes value — especially considering what happened in the last major recession.
A survey of economists by the Financial Times shows that 70% expect a recession sometime in 2023 — largely due to the Federal Reserves actions to tame skyrocketing inflation. A housing correction, though, isn’t in the cards, most say.
That’s because home values usually hold steady during recessionary periods — at least historically speaking. As Mark Fleming, chief economist at First American Financial Corporation, explains, “House prices tend to flatten but not decline.”
Of course, the real estate market during the Great Recession was a notable exception. During that period, the median sale price fell from $238,400 in 2007 to $214,300 by mid-2009 (a 10.1% decline). Here in Columbus, a highly stable market that has been growing at a steady and reasonable pace, the drop was smaller — from $172,531 to $159,840 (a 7.3% decline). In the Miami area, the drop was even bigger — from $330,800 to $199,540 (a 39.7% decline).
Economists aren’t predicting a housing market crash such as that which occurred during the Great Recession, or the reappearance of plummeting prices anywhere near these levels anytime soon. In fact. if a recession does rear its head, most expect it will be mild, with few — if any — major impacts on real estate.
While higher rates are certainly contributing to fewer sales and lower prices in overheated markets such as those in Boise, ID, Colorado Springs, CO, Las Vegas, NV, or Phoenix, AZ. The Federal Reserve would likely move to lower interest rates, too, he says. “So, that actually might help the housing market.”
What’s behind that prediction, and why aren’t we likely to see a significant correction in home prices here in Columbus even if we enter a recession? Experts say it has a lot to do with the conditions of this real estate market — and how starkly different they are from the one seen over a decade ago.
What makes this housing market different?
The Great Recession was a unique scenario — particularly since it coincided with the collapse of many major financial institutions and a stock market crash.
The Great Recession was an anomaly. You rarely get a recession that is caused by a complete meltdown of your financial system.
Ultimately, today’s housing market is just very different from the one that crashed during the recession of 2008, and stricter mortgage lending standards are a big part of that.
Back then, poor lending practices including a high share of subprime loans, and individuals buying homes on speculation (homes which as prices were rising were often purchased, held for a couple of months before being resold for tens of thousands of dollars more than they were originally purchased for, but homes which couldn’t be sold or rented after the market turned and the supply of homes greatly exceeded demand) were big contributors to the crash. During this time, many lenders approved borrowers without even verifying their credit score, income oremployment.
This created a major problem when the economy slid into a recession. Borrowers were laid off, and because their finances weren’t properly vetted, they fell behind on their mortgages. Eventually, that led to a wave of foreclosures, and banks were forced to sell homes at steep discounts, causing a glut of supply and steep dip in home values.
Today, financial regulations require mortgage lenders be far more careful about who they approve.
“The vast majority of loans for the last several years have been plain-vanilla, fixed-rate, fully-amortizing mortgages to people with large down payments, high credit scores, and whose income has actually been verified and who can show that they can afford their monthly payments,” says Jeff Tucker, senior economist at Zillow. “We don’t have that kind of ticking time bomb of people who are going to start to default on mortgages because of this changing payments or homes they can’t afford.”
On top of this, homeowners have a lot of protection in the event the economy were to take a dramatic turn for the worse. The average homeowner now has over $200,000 in home equity (nationally homeowner equity was up 27.8% for Q2 2022). That means owners who do get laid off have options to avoid going into default.
“Say they did lose their job and needed to sell,” says Molly Boesel, chief economist at property data provider CoreLogic. “While that’s a really unfortunate event, they most likely could sell their home and wouldn’t need to go into default.”
Unemployment and rising interest rates: Risks to housing?
One thing to watch is the country’s unemployment rate. If unemployment rises, it could make it harder for homeowners to make their mortgage payments. In some markets, this could result in foreclosures and quick sell-offs, thus increasing the housing supply.
A major surge in unemployment isn’t likely, though — at least looking at current numbers. National unemployment is at 3.6%, hovering around the lowest rate the country’s seen in years. And in Columbus, it’s a mere 3.3%. (During the Great Recession, it got up to 9.7%).
Nationally, we still haven’t seen a wave of layoffs, and the unemployment rate is still very, very low. Thus there’s not much cause for concern on that front specifically for Ohio which was recently ranked the fourth lowest cost state for doing business in the U.S.
Here in Central Ohio the situation is even better as Columbus has been attracting massive investments from major employers including Intel which intends to invest $20-$100B into leading-edge chip factories here in Ohio. Once Intel’s New Albany campus is up and running, it’ll need suppliers to keep its semiconductor chip manufacturing process going and Intel is also expected to bring 50-100 of its suppliers here to Central Ohio.
Columbus has been attracting other major employers including: Facebook with it’s $750M datacenter as well as its recent expansion which will double its investment to $1.5B, Pharmavite (maker of Nature Made and MegaFood) is investing $200M into a new plant in Columbus, Amazon has built two fulfillment centers here in Central Ohio, Ohio is set to be resilient in the face of an economic downturn should . For more on Ohio employers, and doing business in Ohio visit JobsOhio.com.
In addition, Central Ohio is one of the nation’s fastest-growing large metropolitan areas and the fastest in the Midwest, according to the latest population estimates by the U.S. Census Bureau. Columbus grew at a pace of 15.1% from 2010-2020. Suburban communities growing the fastest include New Albany (40.1%), Hilliard (30.5%, Canal Winchester (28.2%), Grandview Heights (28.2%), Dublin (18.1%), Grove City (16%). Outside of Franklin County, Delaware (22.9%) and Union County (20%) grew the fastest.
Mortgage rates are another number to keep on your radar. Though most expect rates to keep rising in the coming months, if we do get hit with a recession, they could decrease in order to promote borrowing and quell the declining economy.
For now, home buyers should view their initial interest rates as temporary (Reduce the Impact of Higher Mortgage Rates with an ARM) and have a plan to refinance down the road, when rates eventually come down.
Renting versus buying
Housing rents are shooting up, and new data suggests they’ll keep climbing at an elevated pace in the years ahead.
The rally began in the housing market, where a buying frenzy dragged national inventory to historic lows and led prices to surge at their fastest rate in over 30 years. Not surprisingly it’s now spilling over into the rental market.
Analysts expect rent prices to keep climbing for the foreseeable future (initially rising home prices were the cause of rising rents, rising mortgage interest rates are the current cause and this will soon be compounded by rising property tax assessments leading to increased property tax bills – 6 Reasons Rents Will Keep Climbing & How To Hedge Against It), a major burden for renters and a key reason to consider buying even if you are concerned that home prices may correct in the short term. Buying a home allows you to lock in your housing expense while entitling you to the tax write offs associated with ownership.
Our Recommendation
If you are planning to stay put for the next 24-36 months buy the home you want now using an Adjustable Rate Mortgage (ARM) with a 3-5 year fixed term — this will allow you to secure a lower rate and thus a lower monthly payment. The Federal Reserve will begin lowering interest rates in the next 12-24 months which will then allow you to refinance into a lower rate. If Central Ohio home prices do decline, again unlikely however, if they do the decline would be a small one due to all of the reasons referenced above (our strong local economy, strong demand for housing, high rents, etc.)
If you’re interested in exploring the option of Buying a Home in Columbus, Ohio please give us a call at 614.332.6984 and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
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