Despite the Federal Bureau of Labor and Statistics reporting the lowest unemployment rate—of 3.5%—in nearly 50 years in September, many economists and real estate professionals still worry about the impact of an economic recession on real estate and the health of the economy. Recently, we discussed the effect of the job market on real estate, concluding that they have a correlative relationship: When people are gainfully employed, they’re more likely to invest. According to a study by Zillow Economic Research, more than half of a panel of 100 real estate and economics experts say they expect the next recession to begin in 2020, with another third predicting it will begin in 2021. And although new construction homes hit a 12-year record high this summer, the panel expects home-buying demand to decrease next year. Here, we’ll discuss the top economic factors affecting real estate today, the impact of an economic slowdown on real estate, and how investors can prepare for the possibility of a forthcoming recession.
Real Estate During the Last RecessionIn order to understand the implications of economic recession on real estate investors and prepare for the recession effect on the real estate market, let’s take a look at what happened during our last US recession.
When was the last recession?The worst—and longest—US recession since the Great Depression lasted from December 2007 until June 2009. During the recession, approximately 8.7 million jobs were lost.
What happened to real estate during the last recession?Prior to the Great Recession (what economists deemed the last economic downturn), the US economy was on the upswing for years–GDP was positive, job growth was on the rise, etc. The housing market was also experiencing positive growth from the mid-’90s to mid-2000s; the average national price of a house was $314,000. In 2007, the housing market crashed. Redfin recently studied which homes are most likely to maintain value during a recession–they analyzed over 100,000 properties before and after the Great Recession. Here’s what they found:
- Single-family homes held their value better than townhomes or condos
- Older properties (built before 1940) held their value better than townhomes or condos
- Homes in more spread-out neighborhoods (i.e. fewer than 61 homes per square mile) held their value better than more dense neighborhoods
What can real estate investors learn from the last recession?During a recession, homeowners are more cautious and less likely to sell their homes or purchase new homes, which ushers in a buyer’s market as home prices fall.
- Sellers: During a recession, many sellers won’t be able to refinance or sell because they don’t have enough equity. They may have to face foreclosure or short sales.
- Fix n’ Flippers: Even before the recession, vacancies and days on the market are rising and their profit margins are decreasing. During a recession, there won’t be many flippers.
- Wholesalers: During a recession, wholesalers’ profit margins tighten, even though there are more distressed sellers, the lack of buyers causes many wholesalers to leave the marketplace.