Can Real Estate Weather a Recession?

Can Real Estate Weather a Recession?

August 2022 Newsletter

The one word on everyone’s mind right now: recession. It can be a scary term, but what actually is a recession? It’s usually defined by a period of temporary economic decline where trade and industrial activity are reduced, generally identified by a fall in GDP for two successive quarters. Well, according to the Bureau of Economic Analysis, Real GDP decreased at an annual rate of 1.6% in the first quarter of 2022, followed by 0.9% in the second quarter. However, some economists are adamant that this doesn’t necessarily signal a recession, as broader indicators like unemployment are still looking very healthy. Overall, there is no consensus yet that we have entered a recession - but Americans in general seem to be convinced we’re heading in to one.

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When we focus specifically on the housing market, there are signs we are already experiencing some recession-like behaviors, particularly as it relates to construction. As a result, new home sales for June totaled around 590,000 across the U.S., which was considerably lower than they were

predicted. During our previous period of economic expansion (2008-2019), we saw extremely weak new home sales - builders missed estimates for several years. Then just as we saw supply spike in 2018, mortgage rates reached 5%, and builders stalled construction for 30 months due to the impact on their profitability. Today, rates are even higher, so will we see another period of building limbo?

The lack of inventory, which has remained far below demand, is without a doubt one of the biggest issues right now.. While the imbalance between supply and demand continues to drive prices up, you may be wondering: how long will this last? Fortunately, we are not looking at a bubble. Since the crash of 2008, lending standards are much tighter, and 44.9% of homeowners are now ‘equity-rich’ according to a recent article from Attom, which means that the balance of the loan is 50% or less the estimated market value. Basically, banks aren’t handing out bad loans, and the majority of homeowners have a very safe position on their mortgages. So as long as demand outweighs supply, prices will continue to rise. But what if we do officially enter a recession? Would that have an effect on home prices?

 

The short answer is yes. However, it’s important to remember how strong our Colorado market is compared to many others in the country. Redfin recently released valuable data about what areas would be most susceptible to a downturn in a recession, and fortunately Colorado is nowhere near the top of the list. Their scale scores markets from 1-100 based on numerous factors, with 100 being the highest chance of a housing downturn. Denver and Colorado Springs scored about a 53, meaning our markets are much more resilient than other states. Even with higher rates, buyer demand in Colorado has continued to drive prices upward. Our current supply of inventory is about 1.6 months in most areas, and for prices to actually decrease, that number would need to be about 6 months or higher. As we discussed above, inventory likely won’t catch up with demand any time soon. So, unless a severe recession stomps out buyer demand, we won’t see home prices come down in Colorado. Most homeowners are in a safe position to weather the storm. Overall, the Colorado housing market looks strong and resilient enough to feel little impact from a recession. 

 

Homeownership is one of the greatest hedges against inflation. By locking in perhaps your largest monthly expense, you can have a lot more financial stability in times of economic uncertainty. 

Monthly Market Snapshots

Monthly Market Snapshots

4-Boulder
2-Colorado-Springs
1-Denver-Metro
5-Eagle-County
3-NOCO

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