What Does A Recession Mean For The Housing Market?

https://ift.tt/QgaI64d

Key Takeaways

Some analysts are putting the probability of a global recession as high as 98.1%.
There are a number of factors pushing the economy this way, including a strong US dollar, the Fed’s interest rate hikes and companies looking to cut costs.
The faltering economy is likely to have an impact on the housing market in the short term, but long term it doesn’t look so bad.
Prospective home buyers may have seen plans change given the rise in mortgage costs, and we’ve got some options to help investors looking to get on the housing ladder.

With a recession looming, what can we expect to happen to real estate prices? Photo by David Paul … [+] Morris/Getty Images)

Getty Images

We’re still not in a recession. Just like your middle school crush, the economic data continues to send mixed messages and the National Bureau of Economic Research (NBER) hasn’t yet called the start of an official recession. That’s because despite there being a lot of negativity floating around, it’s not all bad news.

Inflation remains high, which is bad. But the job market remains strong, which is good. Economic growth is slow but consumer confidence is steady. The stock market has crashed but company revenue is solid.

It’s all very confusing. Just like in middle school.

Analysts and economists are always ready to provide us with projections, but it’s clear that no one really knows how things are going to play out over the coming months. With that said, it’s looking pretty unlikely that we’ll avoid a recession altogether, particularly given the most recent comments by the chairman of the Federal Reserve, Jerome Powell.

He has made it very clear that the number one objective of the Fed is to bring inflation back down to the target range of between 2-3%. Given that it’s remaining stubbornly high at 8.3%, this is going to take some serious movement on interest rates, even given they’ve already been hiked sharply at the most recent Fed meetings.

Moving interest rates up like this in the current economic climate is almost surely going to lead the US into a recession. The Fed knows this, but they’ve made it clear that they view a recession as the lesser of two evils. When faced with the choice of a slow or contracting economy or continuing rapid rises in prices, they’ve decided that inflation is a bigger problem.

This is likely to make it tough for the stock market to recover, as rising rates will make debt like mortgages more expensive and leave households with less cash to spend each month.

But what about the housing market? For many people, buying a home is likely to be the biggest purchase they ever make. For first time buyers, it can be a pretty nerve wracking time, with purchasing decisions having the potential to create long lasting financial impacts.

Our crystal ball is in the shop right now, so we can’t tell you for sure what the housing market is going to do if a recession hits. What we can do is provide you with an overview of what the housing market has done during previous recessions and go over some of the projections from different analysts that are circulating right now.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account. 

Are we headed for a recession?

First things first, are we actually going to go into a recession? As we’ve said, the Fed is accepting a recession as collateral damage in the fight against inflation. Some analysts are putting the probability of a global recession as high as 98%.

There are multiple factors pushing us towards a recession in addition to the Fed’s interest rate policy.

Strong US Dollar

A strong dollar is nice for Americans who are heading overseas for a vacation, but it’s not good news for the stock market or the broader economy. The dollar is increasing in large part due to the Fed increasing interest rates. Higher rates means higher bond yields and higher interest on cash accounts.

This attracts more investment in dollars and pushes the price up. The problem is that for many companies in the S&P 500, it means their overseas profits fall in dollar terms.

For example, if Apple generates €20 million at a time when $1 = €1 then that means $20 million going into Apple’s bank account in California.

If the USD strengthens to $1 = €1.20 then that €20 million only translates to $16.67 million going into the bank account in California.

So the more the dollar rises, the lower the overseas revenue. Morgan Stanley has estimated that for every 1% increase in the dollar index there is a -0.5% hit on S&P 500 earnings. For context, the dollar index is up over 18% so far this year.

Companies are cutting back

We’ve already started to see some major layoffs, particularly in tech. Major companies like Groupon, Peloton, Netflix, BlockFi, Snap, Shopify, Coinbase and Robinhood have all made significant layoffs in 2022.

Even the biggest companies in the room are freezing new hires. A recent report has suggested that Meta CEO Mark Zuckerberg plans to reduce headcount by up to 15%, a figure that represents 12,000 employees.

This comes a number of weeks after he announced that significant measures will be taken to reduce costs across the company.

What usually happens to housing prices during a recession?

So if we accept that a recession is looking pretty likely, what does that mean for the housing market?

The old joke goes that if you get five economists in a room you’ll get seven different opinions. That’s because making projections on the economy is incredibly difficult. There are so many moving parts and unknown variables, that getting it right every time is practically impossible.

Still, there are some individuals who have a better track record than others. Paul Krugman won the Nobel Prize for economics, so that’s a pretty good start. He penned a recent column in the New York Times suggesting that the Fed may be acting too strongly on rates and that we’re likely to see a correction in the housing market.

He explains that higher interest rates means less demand for new homes, which means that construction slows down which then has a flow on impact to reduced consumer spending which then further slows the economy.

It’s a cycle that has played out many times before and it is exceedingly difficult for the Fed to get it precisely right.

So in the short term, we may see a slowdown in the housing market and a reduction in prices.

It’s important to keep in mind that real estate needs to be considered a long term investment. That is true whether you are purchasing a property to rent out, or buying a family home. The purchase shouldn’t be considered in terms of what might happen over the next six months, but rather what might happen over the next 10 or 20 years.

For that we can look at what has happened in the past. It’s no guarantee of what is going to happen in the future, but it can provide some context as to some of the potential outcomes.

If we look at every recession since the year 2000, even home buyers or investors who bought in at the peak right before the recession hit still made a profit after ten years. In some cases, this was a very healthy profit.

The average buyer at the start of the 2001 recession gained 48.59% over the next five years and 27.18% over ten (they caught the tail end of the 2008 recession). Buyers who got in just before the housing market collapse of 2008 were down -15.96% after five years but after ten were back in the green and up 7.73%.

Lucky buyers who bought in prior to the 2020 coronavirus snap recession have been rewarded with gains of over 25%.

The housing market can go down. It can be volatile. But over a long period of time, the chances are that most buyers will make money. This is why for buyers looking to purchase a property to live in, lifestyle factors should play a major role in the decision on whether or not to buy.

Having said that, there’s no getting away from the fact that buying a homer just got a lot more expensive. Rising interest rates means that a mortgage taken out now is going to result in a much higher monthly payment than a mortgage for the same amount taken twelve months ago.

So what can be done to bridge that gap?

How to invest if you’re saving for a home

Many prospective home buyers or movers are likely to have seen their timelines changed recently. Because mortgages have become so much more expensive, it’s going to be harder to buy in a way that keeps the monthly payments affordable.

One of the best ways to tackle this problem is to get a larger down payment together. That’s easier said than done, but one of the best ways to accelerate this process is to consider investing the funds, rather than just leaving them sitting in cash.

Now investing comes with a greater level of risk than money in a bank account, so it’s important to have a long enough time horizon to invest. Generally speaking that’s a minimum of three years, but preferably longer than five.

If you have longer than that, the additional compound growth you can achieve on an investment portfolio can supercharge your down payment.

Because it’s saving for your future home, you probably don’t want to take huge amounts of risk. We know that a lot of investors feel that way, which is that we created Portfolio Protection.

It’s a sophisticated hedging strategy which uses AI and machine learning to adjust the positions each week based on model predictions. We offer this on all of our Foundation Kits, and it can help smooth out the market volatility, just like we’re seeing right now.

It can be a powerful tool to allow investors to seek growth on their money over the long term, while also aiming to reduce the risk in the portfolio overall.