Recession Does Not Always Lead to A Housing Crisis
No one has a crystal ball but here's what I can share with you having worked through many market shifts. The price collapse in 2008 was caused by too many listings. Because there is an almost total stop of activity this time around - at least in CA, when we start up again the inventory most likely will be low and mortgage rates may be at all time lows as well.
So as long as there isn't an absolute flood of inventory on the market, most likely prices will hold in many neighborhoods. I'm blogging about this topic on ellisposner.com if you are interested in learning more.
What I’m going to be tracking, on this site and others, as we go through the next number of weeks, months or however long this lasts, is the total inventory levels in a number of markets.
When we get back to some semblance of normal, if the inventory is low and we still have historic low mortgage rates, it will be a great time for both Buyers and Sellers. What could lead to a downturn is if listings keep coming on the market and not selling or if the market gets flooded at a time that people can’t buy because the outcome is far worse than anticipated.
We are in unprecedented times and I don’t want to sugar coat anything. Some people and families will be devastated and there may be distressed sales. But unlike 2008, most people have substantial equity so even if they have to sell, don’t expect a fire sale.
Meanwhile, I’ll stick to what I know, facts and data. Let’s look at activity since Friday March 20th. I’m picking that as the day after the CA Safer at Home order when both the public as well as real estate professionals should have begun modifying their behavior.
What I’ll be looking at is the total number of listings including the new listings since March 20th (which are included in the total), the properties taken off the market by either being put on hold, canceled or withdrawn and then the cumulative + / -.
Market Snapshot
I included the active listings to a) provide a baseline, and b) compare the properties taken off the market to the entirety which at this point is a small but not inconsequential factor.
If we see inventory levels half, meaning that 50% of the listings that were on the market on March 19th come off either by attrition, closing escrow or removal, by the time we return to normal order, that will most likely back stop a repeat of 2008. That’s an arbitrary number I picked. 30% may be as good.
A question you may about now is why would anyone put a new listing on the market in this environment. I’ll cover that in a future post as well as how deals are getting done and other topics.
The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.”
The higher the index, the easier it is to get a mortgage. As shown above, in the run up to 2008 the index was way up. Now, the index shows how getting a mortgage is even more difficult than it was pre the 2008 crash.
Normal appreciation is 3.6%. While current appreciation is higher than the historic trends, it’s certainly not accelerating like it did in the early 2000s.
The months’ supply of inventory needed to sustain a balanced Real Estate market is considered to be six months. Anything more than that is an overabundance and will causes prices to depreciate. In other words a Buyer’s Market.
Anything less than3 is considered a shortage or Seller’s market as I have written about elsewhere on this site. Seller’s markets = appreciation and over bids. here were too many homes for sale in 2007, and that caused prices to tumble.
Today, there’s was shortage of inventory going into this. So to reiterate my point. Fewer listings when we come off the pause will stabilize the market.
Stay safe at home.