Debunking The Housing Crash: Home Prices Aided By Low Interest Rates

The is the fourth article in our “Debunking the Housing Crash” series.

COVID-19 is one of the most deflationary global events to hit the earth since the meteor that took out the dinosaurs. When much of the United States and many other countries began enforcing stay-at-home orders, the economies of the world came to a grinding halt.

How is it then, that a deflationary event of this magnitude could not trigger a housing crash in the U.S.?

As deflationary of an event as COVID-19 has been globally, there are equal and potentially greater inflationary pressures currently pushing U.S. housing prices higher than they are today.

This series explores each of these pressures in detail.

Reason #4: Home Prices Aided By Low Interest Rates

When the unemployment rate starts to surge and the economy contracts for two consecutive quarters, we are technically in a recession. Recessions are normal and they happen with fairly regular frequency — usually five to ten years apart.

A recession is a time for the economy to slow down and evaluate what’s working and what’s not. Some companies don’t make it through recessions and have to shut down, while others find new opportunities and lead the economy into the next expansion phase. This is normal and should not be thought of as scary, unusual, or unexpected.

It’s also why financial advisors tell us we need “rainy-day” funds — three to six months’ of living expenses saved up so we can make it through something like COVID-19 or if the company we work for goes out of business.

Most of us know and understand the importance of having a few months of living expenses in reserve. However, very few understand why recessions have historically been good for home values.

Many who lived through the Great Recession and the mortgage meltdown erroneously correlate recessions with real estate crashes, but the graph below shows this correlation is actually very low.

Going back to 1970, we can see there has been seven recessions (shown by the grey shaded bars). During each recession, except 1991 and 2008, home prices either stayed the same or increased. In 1991, housing prices only dipped by 1.9% before recovering and steadily rising for the next 17 years.

Looking back over the last fifty years, residential real estate has appreciated at approximately 5% per year despite the seven recessions we’ve survived.

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