We are in an interesting economic cycle.  In the last recession, house prices plummeted up to 60% in some areas.  We currently hit the highest unemployment rate since the great depression yet house prices continue to appreciate.  This is exactly the opposite of what economics would predict.  Why are house prices continuing to rise as opposed to the last recession?  Will this trend continue?

Why are house prices rising?

The exact opposite of what one would expect is occurring.   During recessions, house prices traditionally have fallen in tangent with the economy.  In today’s recession house prices are actually rising due to one variable, supply.  In many markets supply continues to be very limited due to lack of new construction, very high build costs, and limited move up activity.  Furthermore, the Coronavirus has amplified the supply imbalance as many sellers pulled homes off the market prior to the busy spring selling season.

I don’t see any huge changes in supply coming online soon in many markets.  Building has essentially ground to a halt and labor costs have continue to climb.  Furthermore, in desirable areas, there is not much available land left which limits building to more infill locations that are expensive to develop.

What is fundamentally different this recession?

During a recession and increased unemployment one would expect defaults to increase exponentially.  This is what led to the 2008 crisis, there was a sudden wave of defaults and considerable supply entered the market with foreclosures and other distress sales.  In the past, the vast majority of subprime mortgages were made by direct lenders and immediately resold.  The defaults quickly cascaded through the economy and ultimately the real estate market.

  1. Government sponsored loans: Fast forward 10 years and the vast majority of subprime loans are government sponsored, VA, FHA, HUD, etc… and therefore come with a government guarantee which will substantially decrease the losses to the end buyers. In the last recession, when loans went south, buyers of the mortgage paper lost billions.  In today’s market with the large increase in government backing of mortgages, the losses will be much less.  Furthermore, the government has the ability to delay defaults and foreclosure to spread this out over a longer period of time.  This will help ensure there is not a large fire sale of homes hitting the market at the same time.
  2. Corporate purchases of properties: After the last recession, large wall street backed corporate players got into residential real estate buying up thousands of properties. These large portfolio companies can operate rental houses efficiently and will be looking to pick up more properties during this recession.  This will help put a floor under the real estate market as the margins for corporate buyers is much smaller than for smaller operators.

Summary

The lack of supply and the fundamental changes in the real estate market will keep prices relatively flat during this recession.  I don’t see a repeat of 2008 as there are not the excesses that existed prior to the crash.  Since 2008 supply has been considerably constrained and will remain more so as a result of the pandemic.  Furthermore, fundamental changes in the market will also create a “floor” underneath real estate prices.  Although the days of double-digit price increases in many cities are clearly behind us, there is nothing on the horizon that would suggest double digit losses anytime soon.

Additional Reading/Resources

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all we need is our simple one page application (no upfront fees or other games).