According to some news outlets and to the opinions of certain economists, at any moment the U.S. is on the brink of recession. But, over and over again for the last few years, the economy has remained steady.
Technically speaking, the Great Recession began in December 2007 and ended in July 2009, but many Americans continued to deal with the effects – particularly from the housing market crash – into 2012 and 2013.
With approximately 5 million homeowners owing more on their home than what they were worth, some homeowners still haven’t fully recovered. That’s down from the nearly one-third of homeowners sinking in their mortgages in 2012 when negative equity was at its peak.
According to Zillow, home values continue to rise in most major markets and are expected to increase to a total of nearly 5.1% nationally this year. Even though the economy continues to grow, as it has for the last few years, people are nervous about a slow-down. Many wonder how negatively they’ll be affected if there is another downturn.
In spite of the recession, and current issues that could potentially harm the economy, many don’t believe the housing market crash will reoccur in a future decline.
“’When you look back in history, it’s actually quite rare that housing plays a central role in economic downturns,” says Aaron Terrazas, senior economist at Zillow.
There are three key things to know about how the housing market could fare in the next recession, and what you can do to be prepared.
Housing Won’t Be the Problem
According to the third-quarter 2017 Zillow Home Price Expectations Survey released in August, there’s a [52%] chance the next recession will start by the end of 2019, based on responses from 100 economists, investment strategists and housing market analysts… [67%] of the experts surveyed point to a geopolitical crisis as the cause of recession, a far cry from the lax mortgage lending policies and financial liquidity issues that contributed to the Great Recession.
Mark Fleming, chief economist for title insurance company First American Financial Corporation suspects that if a recession were to occur, it is unlikely to be the result of housing-related activity, and therefore the housing sector should be one of the leading sources to come out of the recession. He goes on to say, “the housing market has traditionally aided the economy in recovering from a recession, as consumer who are less effected by the downturn are willing to buy and sell, and existing homeowners are able to take advantage of equity in their property.”
We Should Always Expect Housing Markets to Subside and Flow
In the next recession, housing isn’t expected to be problematic on a national level, but some markets will likely take significantly larger hits than others. Individual housing markets and geographic regions, even outside of a large-scale recession, will witness peaks and plateaus that rise with demand; then experience a downturn once prices are higher than what homebuyers will pay.
Zillow survey responses reveal that most real estate experts anticipate the San Francisco and Miami areas will be affected the most, along with Los Angeles, New York, San Diego and Seattle. As these real estate markets are the most expensive in the country, consumers expect home values to drop in these areas more than other places. But, foreclosures would not be the instantaneous result of a slight dip, even if a slowing economy created home value dips on a national level.
“Housing values can drop somewhat without really affecting the economy because, for the most part, people have an equity – 5, 10, 20 percent [from their down payment] – in addition to anything they’ve built up over time,” Terrazas says. “So they’re not going to be underwater immediately. Home values would have to drop by a large amount for negative equity to come back.”
Homeowners Shouldn’t Worry as Long as They Can Make Payments
While most homeowners are locked into 30-year fixed-rate mortgages, in addition to the equity they have, the vast majority have most likely refinanced during the recent period of historically low interest rates. Fleming says, “homeowners are in a good place should the economy slow [as a result of] low interest [rates], and affordable monthly payments.” He encourages homeowners to refinance as soon as they are able to. “’If you’ve [refinanced] already in the last few years, then doing nothing is the best something you can do,” states Fleming.
There is no need for those millions of homeowners to worry if they are still underwater from the last recession and still making their monthly mortgage payments. The challenge is when a homeowner is underwater on their mortgage, and for one reason or another loses the ability to make their mortgage payment. This should be a concern for all consumers, and not just homeowners.
Personal finance resource GOBankingRates surveyed 1,007 U.S. residents on their current financial status and whether they would be prepared for a recession and published the results financial situation in June. Based on answers to questions like “Do you currently have enough money saved to cover six months of living expenses?” and “Does your investment strategy account for a recession?” among others, the survey found that most Americans are unprepared for a recession.
Living paycheck to paycheck is the reality for 60% of Americans affected by the Great Recession. The number of those without a recession investment strategy equals 68% of respondents, and the number of those who are not ready to look for a new job equals 74%. Whether individuals rent or own their home, now is the time to create a savings cushion before there is any sign of a downturn. Saving between three and six months’ worth of living expenses is wise in the event that a person loses their job.