Breaking the Headlines

By LINDSAY FRICKS

Part of my passion in real estate is applying my analytical expertise that I developed through corporate America to help my friends and clients decipher what’s going on in the housing market. One of the objections I hear most often is that the housing market is going to crash. There’s a lot of speculation and national news media outlets creating fear and fueling angst among consumers about an impending recession. In this blog post I’m going to unpack the three most ominous headlines around the current state of the economy and how they impact the housing market.

Headline 1:

Part of what led to the 2008 crash was the fast run up in home values which caused inflated amounts of equity that homeowners borrowed against. These are called cash out mortgages and, yes, they have been on a steady incline the last couple years and now total almost 81% of all mortgages. At the peak before the 2008 crash the number was 89%. The difference is the amount of cash people are taking out is about 1/6th of the amount borrowed against in 2006 ($50 billion in 2018 versus $321 billion in 2006). In 2006, people were using this money to buy depreciating assets such as fancy cars, motorcycles, ATVs etc…. Now people are taking out money at a much lower rate, but applying it to value adds such as home renovations, schooling for children, reducing revolving credit debt or even to start their dream company. The lending practices from pre-2008 have been replaced by much higher scrutiny and regulations that won’t allow that type of cash to flood the market, thus essentially eliminating this fact as a housing market indicator.

Headline 2:

There are very few leading indicators that even remotely support this headline. Transaction numbers and pricing are the two most common factors that drive the housing economy. On transactions, the two largest buyers of mortgages, Fannie-Mae and Freddie Mac, both predict that we will either break even or be slightly up in total number of real estate transactions versus last year. In Arizona, year to date we are down 8.7% in transactions but total sales volume is relatively flat since we’ve seen a 4.7% increase in median home prices…hardly cause for panic. In fact, if you took the annual historic appreciation rate of 3.6% and applied that trend starting in 2000 you’d see that we just got back on track in late 2018. 4.7% appreciation is higher than historical averages, but we’ve had a soft tapered decline in appreciation over the last year back towards historical norms…no cause for panic.

Headline 3:

Now this headline does have merit as most of the top economists are predicting a recession in the next 1-3 years. The definition of recession is two quarters of GDP decline, which doesn’t necessarily translate into a housing crash. In fact, of the last five recessions, only one of them (2008) resulted in a meaningful decline in housing prices. Three of the five actually resulted in housing price increases. The consensus among the economic community is that price appreciation will soften towards historical averages. Again, hardly the landslide that’s insinuated by the headline.

In conclusion, my recommendation is to make sure you understand the full narrative of what’s going on. if you’re just reading headlines, you’re likely to be in the camp of people that feel impending doom and gloom. The mindset of a country that believes it’s going into recession is powerful enough to create a self-fulfilling prophesy. I encourage you to make sure you read the full story, understand leading indicators and reach out to your trusted advisor to help you unpack headlines that are causing you to lose sleep!

Source: Keeping Current Matters, Cromford Report