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Is the Housing Market Going into a Recession?
A lot of people think that there is going to be a recession for the housing market by the time the 2020 election comes along. Various signals are now being noted and Benn Steil, who is the director of International economics seems to agree. He works with Foreign Relations and he has given a recent interview explaining the up and coming situation.
Benn Steil from International Relations
Benn Steil has released a statement saying that when you look back at the housing crisis that happened in 2008, you will soon see that there were a few warning signs. He believes that by taking note of them, you can effectively predict any future crises that might happen. Preparation is key when it comes to housing market trends, so if there is going to be a recession, the industry needs to take the right measures now to stop it from having an impact as bad as the one that happened in 2008. Steil published a blog post stating that the gap between the growth in housing prices and the general household income is surging. A parallel dynamic is playing out and this could have a devastating impact on the market as a whole.
A lot of first-time buyers wonder, what is homeowners insurance? How would a recession impact this? Why do we need to know this information? The main thing that you need to take note of here is that homeowner’s insurance protects your investment. It gives you a payout if anything should happen to your home and it will also cover you for any damages that result from crime or even vandalism. In a recession, crime soars because youth unemployment rates are higher and people have a harder time making their way in the world. For this reason, having home insurance is vital, and it also helps you to secure the investment you do have should a property recession happen. For example, if your home experiences fire damage when there is a property recession then you will be paying out for damages on a property that isn’t worth what you paid. If you’re a new buyer, this is an especially important point that you need to take into account.
Housing Prices and Growth
In the year 2018, and in 2005, housing prices started to slow. You can see significant drops across several markets and some types of properties are in a free-fall situation. Sure, household income is growing but it hasn’t come anywhere near to the rise in property prices. The median household income in August rose by around 1.3% when compared to the year before. The property increase however is far beyond this. Similar drops like this have come before every recession since the year 1970. When income does not keep pace with the price of properties, the latter falls back. When you have falling house prices, you then drive down household spending. This results in a wealth effect, meaning that consumers cut down on their spending because they know that the assets they have are falling in value.
A lower level of consumer spending accounts for 70% of economic transaction. If trends like this continue to happen then it’s possible that we will see a fall in house prices as soon as 2020. This will drag household spending down and it will also cause other major problems. The economy has been slowing and when you look at the tariff war that has come from Trump you will soon see that this is hitting exports too. Manufacturing is also slowing and retail sales have stalled. This shows that consumer confidence is failing, and this could result in a very bad situation for a range of markets, including real estate.
The Federal Reserve doesn’t have enough power to actually stop a recession. When the economy slows, the Fed cuts the benchmark rate, which makes it much cheaper to borrow. This encourages economic growth, but the problem is that right now, the rate is so low that cutting it again probably won’t be enough to make a difference. If we are on the edge of a recession, then it would take a lot of work to try and ease the transition. The situation right now is challenging to say the least and if something isn’t done soon then this could really hurt the economy while putting the nation in a situation that they have never truly experienced before. Sure, history has showcased recession, but not like what we could be going up against soon.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.
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