Economists have forecasted a recession in our future, but what does that mean for us in the market? Here’s what you need to know.
While summer is in full swing and many of you are probably visiting the shore to enjoy a swim in the calm ocean, it seems that our market is headed into a little bit of rough water due to projections of an upcoming recession. But when will this happen, and what will be the impact?
A Wall Street Journal survey of 36 economists indicated that the economic expansion that began in mid-2009 will most likely end in 2020 as the Federal Reserve raises interest rates to co-op an overheating economy.
A recession does not mean that we’re going to have another housing crisis, though. While it’s true that the last recession we had caused by a housing crisis in 2008, the recession itself was just a period of temporary economic decline.
Now, homeowners have more equity than they did at the height of the housing bubble, partly because people are staying in their houses longer, which gives the property more time to appreciate. At the same time, we haven’t seen owners borrowing as much money from their equity as this did in the past.
The Joint Center for Housing Studies at Harvard University recently put out the State of the Nation’s Housing report, which had big headlines about housing affordability. As you can see at 1:37 in the video above, from 2012 to 2017, monthly homeowner cost went up. Even though homeowner costs have gone up over the last couple years, monthly costs are still lower than they have been from 1987 to 2008 (except 1993).
At 2:00 in the video, we compare historic and current costs of renting versus owning a home. Renting took 25.8% of one’s income for the median rent in this country; today, that number has gone up to 28.8% To own a home, the historic percentage of income needed to afford it was 21%, where it is now 17.1%. Though it’s more expensive to own a home now than the past couple of years, we are still doing well compared to the historic average.
Check out the graph at 2:31 in the video. We’ve fallen from big numbers from 2009 to 2011, but we have to realize that those are the years when distressed properties dominated the market. Foreclosures and short sales were selling at anywhere from a 20% to a 50% discount. If we go back to 1990 and take a look at the affordability index compared to today, we can see that homes today are much more affordable than back then.
Where are prices going? Over the last 12 months, according to CoreLogic, values are up 6.9%, and they’re forecasting that they will rise 5.3% over the next 12 months.
At 3:27, the chart shows that we’ve accounted for this roughly 5% increase in home prices and interest rates. We took a $250,000 home average mortgage, which is about the average mortgage of today’s interest rates, 4.5%, and we calculated the payment with principal and interest. Then we looked at the projections of where interest rates and home prices are going to be in 12 months, and we can see those numbers change dramatically. The cost of the house goes up, and so does the interest rate. That means the mortgage payments go up, too. If you compute that annually, we’re talking about an extra $1,800 out of the buyer’s pockets, and over a 30-year mortgage, that number hits $54,788. This means that waiting to buy a home is costing would-be buyers money every day, and that additional monthly expense over 30 years could be dramatic.
What’s interesting about this is that many homeowners who would ordinarily want to move to a different home are making the decision to stay put and improve the home they’re already in. In fact, 84% of homeowners surveyed said that they have no plans to sell their current prime residence within the next 12 months. Half of the homeowners surveyed are considering a remodel, despite the fact that nearly two-thirds would actually prefer to purchase a new home that meets their needs. However, taking equity out of your home and putting it into remodeling could actually lower the price of your house, depending on the changes you make. So be sure to consider when it makes sense to find a home to move into, instead of just damaging your equity that you’ve built in your current home.
The economy works in cycles, and it looks like we’re headed to rough waters, so be sure that you’re making the right decisions to get the equity you have in your home out.
If you’re thinking of putting your property on the market in the next three months to three years, come to our next free home seller seminar on Saturday, October 13, at the Port Washington Hilton Garden. Visit www.homesharkseminar.com for more information.