Busting 7 Myths about Recessions and the Housing Market
Will there be a foreclosure boom? Are housing prices dropping? Joe Massey and Lon Welsh join us to go behind today’s alarming headlines about recessions and the real estate market. Listen to the episode to learn the truth about 7 economic myths using historical data and analysis.

If you only look at the headlines, the world seems very scary right now.  But today, two of my mentors, Joe Massey and Lon Welsh, are here to talk about national trends in real estate and break down what’s really going on. 

Joe is a loan officer with Castle & Cooke mortgage, while Lon is the founder of Ironton Capital and Your Castle Real Estate. 

They’re answering seven questions about the market and debunking some of the dramatic predictions we’re all hearing.  These are complex topics, and I recommend listening to their full conversation to get all the nuances. 

Two Learning Options!
  1. Listen to the podcast “#415: Busting 7 Myths about Recessions and the Housing Market” Denver Real Estate Investing Podcast
  2. Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast.

1. Will There Be a Foreclosure Boom?

There are several reasons why we’re not expecting a huge uptick in foreclosures any time soon. 

Graph showing lending standards from June 2004-August 2022

Since June 2008, it’s been harder to get a mortgage than in the years leading up to the housing crisis.  Borrowers need to provide proof of their job, income, and assets, which means only qualified borrowers are getting approved.  The more qualified the borrower, the higher the likelihood they are to be able to pay their mortgage.

Mortgage debt load on households graph from January 1980-present

Further, mortgage debt across America is very affordable right now.  When interest rates dropped over the past few years, many homeowners refinanced into the lower rates.  Right now, the average interest rate on a home is the lowest it’s been in 40 years. 

Graph showing negative equity and total markets from 2004 Q2-present

Finally, because housing prices have gone up so much in the past few years, most homeowners are sitting on appreciation.  This makes it easy for them to sell their home if they need to, rather than go through the foreclosure or short sale process. Even if the average home price in America dropped 15%, only 4% of the homes would have negative equity!

All of these factors together make it extremely unlikely there will be an influx of foreclosures. 

2. Will Housing Prices Drop?

It’s unlikely housing prices will drop in the near future.  When we look at housing price predictions from top economists from Freddie Mac, Fannie Mae, the National Association of Realtors, and others, they all predict a price increase at a national level. 

Housing price increase predictions from  top economists

While prices won’t continue to increase as dramatically as they have in recent years, they’re expected to increase 3%-4% over the next five years.  It’s possible that certain neighborhoods will see price drops because the homes there were selling significantly over list, but we don’t expect to see that across the market as a whole. 

One of the reasons we expect prices to increase is because of the lack of housing supply.  After the 2008 market crash, we stopped building houses at the same pace, leading to a decrease in supply.  At the same time, the population is continuing to grow, creating more demand.  Because of this imbalance in supply and demand, it’s unlikely housing prices will drop. 

3. Will a Recession Wreck the Market?

We are almost certain to have a recession, if we’re not in one already.  Historically, recessions last about 2 quarters, so the odds are strong that we’ll be coming out of it this time next year. 

Graph showing home price increases and decreases from past 6 recessions

When we look at the previous recessions, not including the one caused directly by the housing market crash, we can see that home prices increased four out of five times.  Since this recession is not driven by the housing market, we can expect housing prices to follow historic trends.

4. Will Mortgage Rates Go Up or Down?

Interest rates are at 6.25% as of the time of publishing.  Over the last 40 years, the average rate was 8.25%, which is 2% higher than today. 

Looking at the data from 1971 to now, the trend is that interest rates go up just before a recession and then decrease coming out of it. 

Chart showing mortgage rate decreases correlated to past 6 recessions

If you’re thinking about waiting to buy a home until interest rates decrease, consider that we still expect housing prices to increase.  If you wait a year for interest rates to go down, it’s possible you’ll be paying more overall because of the higher price.  In any realistic scenario, it makes sense to buy today then refinance during the recession to take advantage of lower rates.

5. Do Increasing Interest Rates Impact the Real Estate Market?

Home sales decline when interest rates increase, which is what we’re seeing right now.  All of the data indicates that home sales and prices are following the same trends as previous recessions. 

The only unknown we have now is that interest rates increased at double the rate they have historically. Does that mean there will be double the impact on decreased home sales?  It’s possible that sales will decrease for a longer period, but we simply don’t have historic data to compare it to. 

6. How Does Inflation Impact Home Prices?

When we look at historic trends for home prices and inflation, we can see that home prices fared better than inflation.  One reason for this is the largest component of the consumer price index, which measures inflation, is housing. 

Chart tracking inflation and average Denver home price from the 1970s to 2021

Inflation is your best friend if you’re a real estate investor.  Rents increase with inflation, but your fixed mortgage rate doesn’t change.  That means any rent increase is extra money in your pocket.

7. What’s Next for Apartment Pricing?

Many people are concerned that interest rates and cap rates are intertwined.  Lon debunked this myth in a previous episode.  The upshot is that when property values increase, the cap rate decreases and vice versa.  Because rent prices are likely to increase, we expect apartment complex valuations to increase, too. 

Chart showing cap rates and interest rates from 1979-June 2022

If you’re waiting for a drop in apartment complex prices to get a good deal, it’s not likely to happen.

How Can I Use This Data for My Portfolio?

We know that most people hearing all of this data will want to apply it to their own portfolio.  Reach out to any of us with questions, and we’ll be happy to figure out how it impacts your portfolio. 

Want to play run some numbers to see the impact on your portfolio?  Try out our Property Llama portfolio analysis software.  Sign up for your free account today. 

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Authors
Chris Lopez
Chris Lopez is a Denver area real estate entrepreneur and investor, as well as the host of Bigger Pockets’ House Hackerz and the Denver Real Estate Investing Podcast.
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