Are We Going Into a Recession?

There is little, if any, doubt at this point that we are in a significant recession. The current world we are living in — characterized by COVID-19 — seems to perfectly fit the definition.

What is not as clear to most people is that a “black swan” (unforeseen, shocking) event like this is a short-term crisis with long-term opportunity.

A Look at Previous Black Swan Events

If we take a look at history, we can see that there have been many black swan events that have shocked the economy and the stock and housing markets. Some of them have even pushed us into a recession.

Looking at the events above, it’s clear to me that the market has always found a way to overcome challenges. In hindsight, those short-term crises actually ended up being long-term opportunities for those who had the capital to buy when everyone else was freaking out.

We also need to separate and understand the difference between how the stock market reacts to recessions and how the real estate market responds. What history can teach us might surprise you.

Looking back at the last forty years, we can see home prices fared much better than the stock market during recessionary periods. In fact, real estate prices continued to climb in three out of the last five recessions. In the 1991 recession, the housing market dipped marginally but continued its ascent toward higher prices immediately after.

The clear outlier is the Great Recession, which was entirely different because of the irresponsible, sub-prime mortgage practices that were used at the time. This was the age of no documentation for income or assets and very little regard of credit or past payment history.

We enter the current recession having gone through a decade of the toughest mortgage underwriting standards ever on record. Since the Great Recession, buyers have had to prove their income, assets, employment, and overall ability and willingness to pay off a mortgage loan before they are approved.

Real Estate Always Trends Upward

On average, homes in the United States have appreciated at roughly 5% per year. We can see that real estate prices have always trended higher, regardless of economic instability (again, excluding the Great Recession).

This then begs the question:

Why does real estate continue to appreciate in price when there is a slowing or contracting economy?

The answer lies in the chart below.

Each of the gray bars above shows a period of economic recession. As you can see, interest rates typically fall during times of economic slowdown. We are seeing the same thing happen today during the COVID-19 pandemic.

As interest rates fall, housing becomes more affordable — in many cases, even more affordable than renting. When you can buy a home for about the same price as renting, households are incentivized to purchase.

The Bottom Line

In most cases throughout history, recessions are actually good for housing. Why? They make housing more affordable and attract younger renters into the housing market.

During a black swan event, like the COVID-19 crisis, I find it useful to ask myself this question:

“Do I really think this issue will still impact me in three years?”

If you can answer that question with a resounding “NO!”, then today’s short-term crisis could very well be a long-term opportunity for you as well.

At Fairway, we believe buying a home should be simple, low-stress, and fun. We’d love to hear from you and answer any questions you might have about the necessary steps towards mortgage pre-approval and finding a home.