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    The Sad Reason the Housing Market Is Booming During a Recession

    During economic recessions, house prices tend to go down. The reason is quite simple; personal income is one of the most significant factors driving home prices. The more money people make, the…

    The Sad Reason the Housing Market Is Booming During a Recession

    The Sad Reason the Housing Market Is Booming During a Recession The wealth gap is getting bigger

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    During economic recessions, house prices tend to go down. The reason is quite simple; personal income is one of the most significant factors driving home prices. The more money people make, the higher price they can afford to pay for a house.

    During a recession, jobs and income levels decline, which means people have less money and can’t afford to pay as much money for a house.

    In 2020 we are experiencing the most severe recession since the great depression (yes, it’s worse than the financial crisis,) but housing prices are at an all-time high.

    In this article, I’ll explain how that is possible and why it is bad news.

    The 2020 recession is more intense than the financial crisis

    We now have data for the first three quarts of real U.S GDP expressed on an annualized basis.

    Q1: -3% Q2: -37.8% Q3: +30%

    Those are some pretty extreme numbers, and when you add them all up, we find that U.S real GDP is currently down 3.5% compared to where it was at the end of 2019.

    This wild ride is illustrated in the following chart.

    Source: Federal Reserve Bank of St. Louis

    Putting this recession into proper context

    At first glance, you might be thinking that a 3.5% decline in real GDP is no big deal. Which highlights how useless economic data is without the proper context.

    Consider that the peak to trough decline in real U.S GDP during the financial crisis was 3.97%.

    So, we can summarize the severity of this recession as follows.

    Even after a 30% annualized Q2 growth in GDP, and trillions of dollars in monetary and fiscal stimulus, the U.S economy is roughly in the same position it was during the darkest days of the financial crisis.

    The 2008–2009 recession was the most severe since the great depression, and that is roughly where we are at today.

    Yet, Housing prices are at an all-time high

    According to data from the St.Louis Federal Reserve, from August 2019 to August 2020, U.S home prices rose by approximately 5.6%.

    That is represented in the following graph, where the official start of the recession is measured in the yellow shaded area.

    Source: Federal Reserve Bank of St. Louis

    By the same measure, home prices were down nearly 22% from January 2007 to February 2010.

    Source: Federal Reserve Bank of St. Louis

    It’s all about income

    So, why are home prices rising to all-time highs in 2020 when they fell sharply during the financial crisis?

    Remember, at the beginning of this article, I mentioned that personal income is one of the most important factors that drive housing prices.

    During the financial crisis, governments responded with monetary stimulus but not nearly enough fiscal stimulus.

    During 2020, governments around the world have provided unprecedented levels of fiscal stimulus. Put simply, much of this fiscal stimulus has replaced the income of people who lost their job during the recession.

    So, even though this recession is even more severe than the financial crisis, personal incomes have not been impacted in the same way due to the fiscal stimulus.

    Which is a good thing.

    However, the fiscal stimulus does not tell the whole story as to why house prices are rising. What really impacts the price of housing is the income of people who are in the market to buy a house.

    Which is where the sad part of the story comes into play.

    Low-income earners have been hit hardest in 2020

    As illustrated in a research letter from the San Fransisco Federal Reserve, workers in the bottom 25% of earnings made up half of the job losses during this recession. While in comparison, high-income workers were less impacted.

    Low-income workers have been hit hardest, but that would have little impact on the demand for houses because low-income earners can’t afford to buy houses; They rent.

    It is the middle to high-income earners who buy houses, and their incomes were less impacted. Couple that with the fiscal stimulus and rock bottom interest rates, those higher income earners that were lucky enough to keep their job have been bidding up the price of houses.

    Wealth inequality is on the rise

    Consider the following facts.

    Housing prices, the largest component of personal wealth, is at an all-time high.

    The stock market is also at an all-time high.

    Many high-income earners have been lucky enough to work from home and keep their jobs.

    This allows them to invest more in housing and the stock market.

    The lowest income earners have been hit the hardest.

    Low-income earners are also much less likely to own their home or have any money invested in the stock market. This means they have not benefited from the rebound in these asset prices.

    Source : themakingofamillionaire.com

    Here's What a Recession Could Do to the Housing Market

    It may not be as scary as homeowners expect.

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    Here's What a Recession Could Do to the Housing Market

    By Maurie Backman - Updated May 19, 2022 at 9:07AM

    KEY POINTS

    Right now, home values are up on a national level.

    A recession could cause a dip in home prices, but it won't necessarily be a catastrophic one.

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    It may not be as scary as homeowners expect.

    The U.S. economy has experienced its share of prolonged economic downturns. In fact, many of us might remember the Great Recession, which lasted from 2007 to 2009.

    During that time, unemployment levels soared while home values bottomed out. And so back then, it was a tough time to be a homeowner and real estate investor.

    Meanwhile, right now, the housing market is sizzling hot. Home prices are still sitting near record highs, and buyer demand is soaring.

    Image source: Getty Images.

    But an economic recession could bring some very big changes to the housing market. Here's what could happen if the economy takes a notable turn for the worse.

    The red-hot market could finally cool off

    There are different benchmarks used to define a recession, but often, it's marked by a period of high unemployment. Sometimes, stock values will plunge during a recession, though that doesn't always happen. Similarly, home values can plunge during a recession, but the extent to which that happens may hinge largely on factors like borrowing rates and buyer demand.

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    If the U.S. economy enters recession territory -- something some financial experts have been warning could happen -- it might help drive home prices in a downward direction. But that's not necessarily a bad thing.

    As of late March, home prices were up 15% on an annual basis, per the National Association of Realtors (NAR). That means there's lots of room for home prices to come down without creating a crisis situation that leaves millions of homeowners underwater on their mortgages.

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    The main reason home prices are so inflated right now is that inventory is low and demand is high. If a recession were to hit, it could result in lessened demand -- especially if mortgage rates stay as high as they are right now, or keep climbing. And that could, in turn, bring home prices down to more moderate levels.

    But unless housing inventory really picks up soon, we're unlikely to see a catastrophic drop in home prices because supply is still so incredibly low. As of the end of March, there was only a two-month supply of available homes on the market, according to the NAR. That's well below the four- to six-month supply that's normally found in an equalized housing market.

    Because inventory is so low right now, even a notable drop in buyer demand shouldn't result in a housing market crash. If anything, what it might do is open up the housing market, allowing financially secure first-time buyers to finally have a shot at owning property as well as real estate investors to scoop up income properties more affordably.

    Should homeowners be worried about a recession?

    Right now, homeowners are sitting on record levels of equity. But even if a recession hits and home prices drop, they shouldn't fall to such low levels that equity is wiped out.

    In fact, because the housing market still sorely lacks inventory, a near-term recession could actually end up minimally impacting home values. That's something current property owners can take comfort in.

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    Buying a House During a Recession

    Recessions bring a drop in home prices and mortgage rates but also an increase in foreclosures and short sales. Is it the right time to buy? Learn what you need to consider.

    MORTGAGES & HOME LOANS REAL ESTATE RESOURCES

    Buying a House During a Recession

    Buying a House During a Recession Is a recession a good time to buy a house?

    •••

    BY ELIZABETH WEINTRAUB Updated April 18, 2022

    REVIEWED BY LEA D. URADU

    FACT CHECKED BY DANIEL RATHBURN

    Recessions and falling home prices aren't anything new. Housing prices took a nosedive during the Great Depression of 1929 and, in hindsight, that housing recession wasn't really a good time to buy real estate in the short term because it lasted until 1939.

    Dating back to 1945, there have been 11 recessions that have taken, on average, 11 months to reach their lowest point. Many of them shared drops in stock prices and consumer confidence—and they were all good times to buy real estate.1

    You should know all the pros and cons regardless before you plunge in.

    Before You Buy: Be Honest About Your Finances

    The question isn't really how low can prices go during a recession. It's how much real estate you can afford to buy before prices go back up. Paying your mortgage and riding out the downturn is just as important as finding a low-priced home.

    Make an honest appraisal of your own financial circumstances and use our mortgage payment calculator to determine what you can afford.

    Calculate Your Monthly Payment

    $ $ % Or Credit Score % OR MONTHLY PAYMENT

    $ 1,969.22 /month for 30 years

    Monthly Payment $1,969.23

    Principal & Interest

    $ 1,351.56 Property Taxes $ 506.67

    Homeowners Insurance

    $ 111.00 Mortgage Size $304,000.00 Mortgage Interest* $182,560.32

    Total Mortgage Paid*

    $486,560.32

    *Assuming a fixed interest rate. A variable rate could give you a lower upfront rate. To understand more click here.

    Understanding how solid your finances are is just as important during a recession as finding a good deal on real estate. For example, job instability can turn even a bargain home purchase into financial hardship. If you’re a business owner, gauge how likely it is that your business will continue to thrive in the current economy.

    Advantages of Buying During a Recession

    Prices Are Lower

    Home values tend to fall during a recession. So, if you’re searching for a home, you’re likely to find:

    Homeowners who are willing to lower their asking prices

    Homeowners doing short sales to get out from under their mortgages

    Banks selling foreclosed properties

    Each of these scenarios typically results in purchases prices below or well below what the home would demand during a healthy economy.

    For example, the average sale price of a home from January to March 2007 was $322,100. When the Great Recession hit the following year, home prices fell. They hit their lowest point two years later, averaging $257,000 from January to March 2009.2

    During that same time frame, foreclosures more than doubled from less than 150,000 to more than 350,000.3

    The combination of reduced pricing and more foreclosures brings cheaper homes into the market.

    Rates Are Lower

    Along with falling home prices, recessions tend to bring falling mortgage rates. The housing industry plays an important role in the economy. So, by lowering mortgage rates during a recession, the federal government hopes to buoy home sales by making it cheaper to borrow mortgages.

    In late January 2007, the average rate for a 30-year fixed-rate mortgage in the U.S. was 6.25%. Two years later, in the thick of the recession, the same rate dropped to 5.10%.4 That 1.15% drop would reduce your monthly payment on a $300,000 mortgage by nearly $220.

    Get quotes from multiple lenders to make sure you’re getting the best rate possible.

    Drawbacks to Buying in a Housing Recession

    Not every home you spot for sale will be a good deal. Some of the lowest-priced homes will be those that require repairs, so you should be able to tell the difference between a major rehab or a home that just requires small cosmetic fixes.

    One of the reasons you may encounter homes that need more work than usual is time. If the homeowners moved out or the home was foreclosed, it may have been sitting vacant for months without any upkeep.

    Be Wary of Foreclosures and Short Sales

    Foreclosures and short sales abound in poor economies. Mortgage defaults affect home values, and nearby homes often feel the effect of foreclosures, especially when many foreclosures have been filed.

    In a foreclosure, the lender seizes the home because of non-payment and transfers the title to its name. In a short sale, the homeowner sells the home for less than what he or she owes, in order to avoid foreclosure.

    Homes in foreclosure or up for short sale often sell for below market value, which makes them an enticing option for homebuyers. However, these homes often come with a variety of issues:

    Short sales often involve multiple lenders and take a long time to close

    Homes may show severe damage due to prolonged vacancies

    Foreclosed homes are sold as-is, in many cases56

    Source : www.thebalance.com

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