Preparing for a Possible Recession
November 13, 2019 |
It’s hard to turn on the news without hearing economists debate when the next recession will rear its head. As a consumer, preparing for a recession can be difficult. The economy has grown steadily for years, but experts are trying to understand whether the U.S. economy is headed for a full-blown economic recession or just a period of slow growth.
As of January 2020, many key economic indicators are still strong and consumer confidence is high. In the Ohio real estate market, major cities are seeing small real estate booms. Eager buyers and high-demand homes have created healthy markets for real estate agents.
Although we can’t predict the future, anticipating the effects of a recession on the real estate industry are vital to getting through a market downturn.
Here are 4 things you need to know about real estate and symptoms of recession.
Markets are cyclical
What goes up must come down. Believe it or not, markets naturally rise and fall. According to The National Bureau of Economic Research, an economy rises for about 3.2 years, and then falls for about 1.5 years, and rises again. This cycle completes itself every 4 to 5 years, so recessions are more common than you might think.
A recession is a market’s natural response to years of growth. Understanding market cycles and anticipating changes is the best way to prepare for a possible recession.
It’s called The Great Recession for a reason
The Great Recession of 2008 lasted exactly 1.5 years, making it the second-longest recession in recorded U.S. history. The longest recession was the Great Depression of 1929, which lasted 3.6 years and affected the global economy for over a decade.
In addition, the 2008 financial crisis was an unusually severe recession with a wider impact than we typically see. Most people can expect to live through over 10 economic recessions in their lives. Although we will probably see more recessions in our lifetimes, The Great Recession was an unusually severe crash that we probably won’t see again.
Different factors are at play
So, what made The Great Recession so bad? Due to deregulation in the finance industry, in the early 2000s big banks were allowed to participate in high-risk hedge fund trading of derivatives. To meet the demand for derivatives, banks approved record numbers of subprime mortgages to homebuyers who didn’t qualify for conventional mortgages. This drove up demand for houses, but when the Federal Reserve raised interest rates on subprime mortgages many homeowners found that they couldn’t afford the higher payments. Homeowners unsuccessfully attempted to sell their homes and instead defaulted on their mortgages.
At its peak in 2008, The Great Recession impacted the real estate industry, the banking industry, and the global economy. Although homebuying demand may slow in the coming years, financial experts anticipate that a recession would more likely be caused by changes in international trade policy, politics, or stock market correction.
Ohio’s housing market is a safe bet
Luckily, Ohio’s major cities are well-prepared to handle an economic slowdown. The real estate research firm Redfin found that housing markets in Columbus, Cincinnati, and Cleveland are at relatively low-risk for a significant recession. Increasing home prices coupled with low inventories help ensure that real estate will be safe from an economic downturn. This is particularly true in major cities seeing low unemployment, wage growth, and low interest rates.
Rural areas of the state may be more directly affected by an economic downturn. Rural job growth was slowed after the Great Recession, and aging rural residents may have different needs and resources than homebuyers in other parts of the state. Overall, the Ohio real estate market is well-prepared for economic changes.
So, what does it all mean?
Although news reports may seem grim, the reality is the real estate market is probably safe from a looming recession. We can’t be certain that real estate will be unaffected, but understanding the causes and symptoms of a slowdown can help you navigate industry changes and keep homebuyers informed.
Want to learn more about Ohio’s housing markets? Check out our article on the Columbus real estate.