These are strange and anxious times we live in. On one hand its amazing to know the whole world, in one way or another, is in quarantine. Almost eight billion people staying home or severely limiting the time they spend outside and with others. On the other, the Covid-19 pandemic produces a ton of anxiety for many diverse reasons. One important anxiety causing reason is the economy and the possibility of a housing market crash.
Uncertainty is rearing its ugly head bringing fears of a 2008-like housing market crash. For many, the recession of 2008 is the only market shift they know, and it was a huge one, which is why there is so much concern today. However, despite the short-term future looking sluggish for the general economy, housing will be fine. The housing market today is very different than in 2008, with conditions pointing to stability not volatility.
Perhaps the biggest difference between 2008, and our situation today is that the Great Recession was system driven rather than event driven. History has recorded the various causes, but at its core was the breakdown of the home buying financial system, from how mortgages were offered, underwritten, packaged and sold to institutional investors. The overall process became fraught with moral hazard undermining the traditional solid base of home ownership, making mortgages very easy to obtain, creating a house of cards which could no longer sustain itself. At the same time, the ease of buying a home formed a frothing bubble which saw values increase in days, where years are traditionally needed. In short the system was broken
By contrast, 2020 is experiencing a global pandemic from Covid-19, a highly contagious virus. This is a singular event, one big thing that not only hit one community, but the whole world. Despite the pandemic’s reach, it is still only one event, which will eventually end. The real estate market was strong coming into it, as was our economy. It is as if someone pressed the pause button on the economy and stopped everything. Though there are consequences, unemployment for example, once the economy starts again it will run and quickly correct, absorbing many of the consequences. Nothing was broken on a basic scale.
In terms of real estate prices, supply and demand dynamics still hold. Before the pandemic there was no coming bubble and inventory remained tight. Thus far nothing has occurred during the quarantine to change these factors. Absent fundamental changes in inventory or financing to cause a significant drop in prices, there should be little prolonged variation in price. A healthy market with strong indicators equals a safe lending environment. Things will go back to normal and, if anything, we might encounter a short term price drop due to fear, followed by a small increase due to pent up demand created during the quarantine.
Another big difference is the general impact of Covid-19 versus the economic recovery from the quarantine. In 2008, the explosion of a broken system lead to consequences that took years to correct. This meant the recovery, in terms of GDP growth, looked like an L, with a large drop following the initial crash then a flat line for a while before growth began. Conversely, economists believe the losses experienced in the economy due to short term consequences, businesses closing, layoffs, and lack of economic activity, will be recuperated in a short time, which will look like a V. Or maybe a U if it takes a little longer to reopen some businesses.
Finally, there is now awareness a global pandemic is possible and it is necessary to learn from this experience. The United States is an amazing country with the capacity to adjust, pivot and continue. Meaning a vaccine will be found and adjustments to supply chains made to ensure shortages do not exist the next time there is a similar problem. Contingency plans will be in place so the healthcare system won’t be overwhelmed and that the economy does need to be paused. The abilities to learn, adapt, and change lead to better preparation no matter what type of event occurs.
Looking at the current landscape, uncertainty leads to fear of a potential crash in the housing market, maybe even as bad as 2008. However, current fundamental conditions don’t support that emotional response. Rather the key differences between 2008 and 2020, point to the fact that we will be fine coming out of the pandemic. Housing will recover quickly, and we may even experience a very competitive market in the second semester because of pent up demand. Many buyers whose processes where stopped during the quarantine will dive back into the market once things are back to normal, fear and uncertainty recede. Moreover, the housing market has not completely stopped with transaction levels between 60 and 70% of pre pandemic levels. In short, this will pass, and housing will be just fine.