With a looming recession and record unemployment, real estate might be poised to save the economy. From everything economists can predict given the current market trends and data, this recession will be vastly different from what happened in 2008.
The Current Recession
Goldman Sachs is predicting zero GDP growth in Q1 2020 and 5 percent contraction in Q2. They’re calling for a 3 percent GDP growth in Q3 and a 4 percent growth in Q4, as consumers and businesses are finally able to spend after so much time at home.
The current recession is an inevitable side effect of the stay-at-home orders and shuttered businesses in many states.
It’s simply not possible to force businesses to close, force consumers to stay home, and maintain a profitable economy.
Real estate deals and mortgage applications have dropped off in the wake of the pandemic. Consumers are staying in, ordering food delivery, and limiting their purchases to consumer staples (like groceries).
While canned beans and toilet paper are having their heyday, that sort of spending is not going to be enough to prevent a recession.
How the Housing Market Performs in a Recession
Back in 2008, the housing market was the cause of the recession (remember subprime lending?).
Banks gave out risky loans to buyers who were nowhere near qualified, then turned around and sold that debt to investors.
When it all came crashing down, banks needed a public bailout to stay afloat. Many shuttered altogether.
In the wake of the 2008 recession, laws such as the Dodd-Frank Act were put in place to prevent a reoccurrence of the subprime mortgage crisis, and mortgage lenders were prohibited from making the risky sort of loans they’d offered prior to 2008.
As a result of these new laws, banks today are strong — so is housing.
This gives analysts reason to remain optimistic in the face of the present crisis.
Once new infections are brought to zero, the economy can begin to expand, short-term economic issues will resolve, and everyone can get back to making deals.
How the Fed is Helping
The government has learned some lessons from 2008, when consumers cried out over the rescue of “too big to fail” banks that hung average folks out to dry.
While the Federal Reserve has tightened interest rates to near-zero to stimulate the economy, Congress has passed major aid packages aimed at individuals, small businesses, and untraditional workers (like gig economy drivers).
The Federal Reserve Bank of New York has purchased over $500 billion in Treasuries and an additional $200 billion of mortgage securities.
Whereas 2008 led to a foreclosure crisis as borrowers who should never have qualified failed to make mortgage payments, many mortgage lenders have stepped up with 90-day mortgage deferral plans that allow consumers to delay mortgage payments for a three-month period.
The Fed’s actions have made it less expensive for borrowers to finance new construction. Construction workers tend to work in small crews, maintaining distance from one another.
As a result, many experts believe the residential construction industry is unlikely to be severely impacted by the coronavirus.
Workers can make progress on new constructions whole chipping away at the housing deficit in the US, which is currently 3.3 million homes.
As explained by the experts at Housing Wire, rebalancing the housing supply and demand equation will bolster the economy, benefit consumers, and stimulate the real estate market.
Many investors see this time as an opportunity to make the most of the drop in market prices. While real estate investors are faced with a shortage of inventory on the market at present, now may be more important than ever to focus on off-market opportunities.
To explore real estate inventory and find your next investment property, contact New Western today. Our local agents can connect you to exclusive, off-market deals to match your investment goals.