Amidst the last 12 weeks of the COVID-19 pandemic, most cities have witnessed a suspension of their housing markets and are experiencing massive decreases in new inventory. While real estate appears to be frozen, most existing properties are still being bought and sold through virtual showings. However, many real estate professionals are anticipating an economic crash from the prolonged shutdown. While it will be difficult to determine the probability of a recession, factors of the 2008 recession compared to the factors of the COVID-19 pandemic could determine how the real estate market sectors will react to an extensive shutdown.
What happened to the real estate market in 2008?
The 2008 crisis was not a public health scare, but rather an economic crisis that emerged from a housing bubble that burst from unregulated mortgage lending and mortgage-backed securities tied to other parts of the economy, such as hedge funds, pensions, insurance companies, banks, the stock market, and other wealthy investors. The mortgage securitization chain that formed from its dependency on other organizations and companies to pay for properties produced an overwhelming bubble. When the borrowers became unable to pay their mortgages, the real estate market began to erode, bringing the entire economy down with it.
Two main factors led up to the collapse of the real estate market: too much supply and unregulated mortgage lending. By 2005, single-family houses were being constructed at an enormous rate, enough to oversupply demand. Because of such a large supply, many banks began to sell houses to people who would usually not qualify for a mortgage. The flimsy mortgages lacked lending standards, such as no down payments (usually 20% of the total house price) and no income qualification. As a result, the housing market began to fall apart when owners were unable to pay their mortgages. When the housing market started to slip, other investors and banks pulled out, and soon the entire economy plummeted.
The 2008 crisis witnessed an oversupply of real estate for sale with not enough demand for properties, resulting in a loss of equity to most properties. Homeowners were not able to sell their homes and move, without underselling their properties. During the time period we are living in now, the demand for homeownership will remain the same: competitive. Entry-level houses will remain in high demand due to their necessity among single families. Supply will vary as the shutdown ends and more listings are put up.
Key differences in 2020 from 2008 from a residential perspective
Separation of real estate from securities and investments
In 2008, the housing market was involved in several different investments, such as the stock market. Since the housing bubble, the real estate world attempted to separate the housing market from other investments. Housing is no longer tied to the stock market. The only real threat of losing money in the housing market today will be investors investing money into multiple real estate properties, excluding single property homeowners.
Presence of Equity
In 2008, real estate lost almost all of its equity. In today’s market, there is still equity, as home values have not decreased. Only the supply of homes has decreased since COVID-19 has begun because of the shutdown. One aspect of equity to consider is how each state and city will reassess property based on the challenges that COVID-19 brings to society now, whether that be cities striving to protect their citizens from tax increases or relying on their citizens’ taxes for revenue.
Regulated bank protocols
In 2008, there were fewer regulations on mortgage applications. Would-be homebuyers could get a mortgage without putting a down payment and without verifying their income. Different reform bills such as the 2010 Dodd-Frank bill created more qualifications for mortgages, eliminating a crucial part of why the recession happened. As a result, foreclosure rates and mortgage delinquency rates have drastically decreased since the 2008 recession.
The federal government has restricted foreclosures of homeowners during the COVID-19 pandemic. This has created lenient standards for those unable to pay their mortgages. In 2008, there was an 81% filing record amount of foreclosures, while 2020 hit a record low for foreclosure filing.
Less construction on residential homes
The 2008 crisis involved many home builder constructions to the point where there was too much supply and not enough demand. Now, that is not the case. The state of construction of single-family houses in January 2020 is about 40% less than how much it was in January of 2008. Homebuilders are more prepared for a shutdown because of the 2008 crisis in that they are regulating supply more carefully and have dealt with a consistent 22% decline since the recession.
Seasonal and Cyclical timing
The seasonal and cyclical timing of the real estate market at the start of the recession and the pandemic occurred at opposite times of the cycle. The real estate market starts up at the beginning of the year and peaks in the spring for buying property. By August, the traditional buying market ends. September marks the beginning of new listings until the next buying market begins at the start of the new year. The 2008 crisis started when the stock market crashed at the end of September of 2008. However, the Covid-19 Pandemic Shutdown started in March 2020, about 6 months later than when the 2008 crisis began. With flipped supply and demand in real estate for the 2008 and 2020 crises, the cause may be from the different timings of shutdown in each crisis.
How will these changes affect the real estate market?
While both the Great Recession and the COVID-19 shutdown both resulted in the market pausing, the key differences from 2008 will not repeat going into 2020. Key differences with bank regulations for loaning as well as separation from investment organizations, the real estate market should not erode as it had before. Concerns to pay attention to are how the economy will do after the shutdown. If the economy falls, then other parts of our society, including the real estate market, will fall. Paying attention to aspects of property equity, how mortgage companies will recover from postponements of payments, and how vacancies will fill after the shutdown will all be key attributes on how the market should recover.