{"id":14549,"date":"2020-02-27T08:26:08","date_gmt":"2020-02-27T16:26:08","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=14549"},"modified":"2024-05-29T11:52:17","modified_gmt":"2024-05-29T18:52:17","slug":"buyer-housing-market-recession","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-housing-market-recession\/","title":{"rendered":"What Does Housing Market Recession Mean?"},"content":{"rendered":"

The word \u201crecession\u201d can feel scary to people who aren\u2019t economists \u2014 especially to homeowners with a big asset to protect. And that\u2019s understandable given that we associate \u201crecession\u201d with what happened in 2008, an event that took the economy years to recover from. Add to that the fact that an economic recession can lead to an economic depression \u2014 like the Great Depression<\/a> that started in 1929 and lasted an entire decade \u2014 and the idea of a recession making people nervous is pretty reasonable.<\/p>\n

But knowledge is power, and we\u2019re going to empower you by digging into what exactly a recession is and the signs that one might be on the horizon. If you’re nervous that a recession could be looming (especially when you’re thinking about transacting in the middle of a public crisis, such as the coronavirus pandemic), here are some ways you can think about it.<\/p>\n

\"Houses<\/a>
Source: (Vincent Gerbouin \/ Pexels)<\/figcaption><\/figure>\n

What is a recession?<\/h2>\n

An economic recession is part of the normal economic cycle of growth and contraction. A recession<\/a> is when the economy is shrinking instead of growing or plateauing.<\/p>\n

A recession is technically indicated via a country\u2019s GDP (gross domestic product). The GDP is the aggregate amount of how much money all of the goods and services are worth that were produced during a specific time period in a single country. GDP is expressed as a dollar amount in the U.S., in euros in Europe, in yuan in China, and so on.<\/p>\n

For a country to be in an economic recession, the GDP must fall for two quarters in a row. The recession doesn\u2019t end until the GDP begins to rise rather than fall. There is no time limit to recessions, which can develop into economic depressions or end when the economy begins to recover.<\/p>\n

Housing market recessions<\/h3>\n

The housing market doesn\u2019t actually experience recessions, but it can sometimes crash as a result of an economic recession or show indications that a recession is coming. The Great Recession was a global recession that happened in 2008 through 2009 and one of the first indicators it was coming was the subprime mortgage crisis of 2007 and 2008.<\/p>\n

When a housing market crashes or the \u201cbubble pops,\u201d home prices that were consistently rising suddenly plateau and then begin to fall.<\/p>\n

Tobin Bossola<\/a>, a top real estate agent in Jacksonville, Florida<\/a>, who worked with clients through the Great Recession, warns homeowners to avoid using their home equity as a piggy bank for frivolous things.<\/p>\n

He explains: \u201cIf you want to reinvest that money into your home with a kitchen renovation or something where you’re going enjoy that return as well as see some appreciation,\u201d then go for it, but be careful to avoid \u201cthings that may not benefit you in the long run or add value to your life.\u201d \u201cThat’s where people find themselves in trouble.\u201d<\/p>\n

\"Hands<\/a>
Source: (Adeolu Eletu \/ Unsplash)<\/figcaption><\/figure>\n

So how do I know if a recession or a housing crash is coming?<\/h2>\n

While it\u2019s hard to accurately predict when a recession or housing crash will happen, there are several indicators you can watch. When several of these signal an economic downturn, it\u2019s smart to brace your finances for a recession or housing crash. These signs include:<\/p>\n

GDP growth<\/h3>\n

In a healthy economy, the GDP is growing year after year. When the GDP of a country slows down, it could be a sign that it is about to stop growing or even that it might start to shrink. When businesses are forced to stop producing goods or close down entirely due to a crisis, the GDP will almost inevitably stop growing and could start to fall.<\/p>\n

Consumer confidence<\/h3>\n

You might not think of people\u2019s feelings as an economic indicator, but the way we feel impacts how we spend, especially on expensive items like a house.<\/p>\n

When people feel nervous, they spend less money on both short-term and long-term investments (like housing). This can have a cyclical or compounding effect on the economy and trigger or exacerbate a recession.<\/p>\n

The bond market inverted yield curve (aka: the Treasury yield curve)<\/h3>\n

This is probably the best-known sign of a recession and the one most financial advisors and bankers cite first when they\u2019re warning about an impending economic recession.<\/p>\n

The inverted yield curve<\/a> happens when short-term bonds deliver a higher yield (or rate of return) than long-term bonds. In a healthy market, the reverse is true, and long-term bonds will deliver higher yields.<\/p>\n

When investors expect a greater return for short-term bonds than for long-term ones, it\u2019s because they feel there is going to be short-term volatility and increased risk. An inverted yield curve occurred shortly before the Great Recession.<\/p>\n

\"A<\/a>
Source: (Ishant Mishra \/ Unsplash)<\/figcaption><\/figure>\n

The stock market is consistently down<\/h3>\n

While the stock market isn\u2019t the most reliable economic recession indicator, it is worth watching as the stock market can impact home prices<\/a>. If the overall stock market is consistently dropping in value, companies will have less money to invest in future growth. Continued business growth is necessary for a strong economy.<\/p>\n

However, if just a few companies are dropping in value and not the overall stock market, it\u2019s a sign that those companies or industries are failing, not the overall economy<\/p>\n

Corporate profits<\/h3>\n

When a few companies are struggling, we should not see it as a market-wide concern, but when lots of companies or big companies are struggling, this can be an indicator of a slowing economy. In this case, struggling means smaller earnings growth than normal or than expected.<\/p>\n

Company profits are an indicator only when there are several quarters or several big companies that are showing slower-than-normal or slower-than-expected earnings growth. During the coronavirus pandemic, which impacted every industry, we saw company profits sliding first, and then we knew GDP growth was going to fall.<\/p>\n

Inflation<\/h3>\n

Inflation<\/a> is the increase in the general price level of services and goods that impacts the overall cost of living. When inflation rises, wages need to keep up. Historically, when inflation has outpaced cost-of-living wage increases, consumer confidence has dropped, exacerbating the situation.<\/p>\n

Inflation is calculated by industry and averaged across industries to find the overall inflation rate<\/a>. Some industries experience faster-than-average inflation and others slower-than-average, which is why economists look at the overall inflation rate.<\/p>\n

While inflation is normal even in a healthy economy, when overall inflation exceeds 2%, it can result in an economic slowdown. Similarly, when inflation is too low, it can be a signal that demand for goods and services is lower than it should be. This can result in an economic slowdown and depressed wages.<\/p>\n

Purchasing managers index (PMI)<\/h3>\n

The purchasing managers index (PMI)<\/a> is a measure of manufacturing growth from month to month. When it slows down or dips, it\u2019s a clear sign that the economy is slowing.<\/p>\n

The PMI is represented by a number from 0 to 100. Any number above 50 represents an economic expansion, and any number below 50 represents an economic contraction. A PMI of 50 represents no change. The further away from 50 the PMI is, the greater the month-to-month change.<\/p>\n

\"A<\/a>
Source: (Vidar Nordli-Mathisen \/ Unsplash)<\/figcaption><\/figure>\n

Cass Freight Index<\/h3>\n

The Cass Freight Index<\/a> is a measure of North American freight shipping volumes and expenditures. While some months are busier than others, when shipping volumes and expenditures slow down or drop over time, it\u2019s a sign that the economy is slowing down as well.<\/p>\n

Housing construction and sales<\/h3>\n

Housing is a fairly stable long-term investment, so when people have money to spend on their homes, they do. When housing sales and construction slow, it can be a sign of a slowing economy.<\/p>\n

Copper prices<\/h3>\n

Construction for both houses and commercial buildings use copper, so it\u2019s an in-demand material. When the price of copper falls, it\u2019s a sign that there is less demand for copper, which means fewer houses and commercial buildings are being constructed. As you know from above, that\u2019s a sign the economy could be slowing.<\/p>\n

Gold prices<\/h3>\n

Gold is considered a timeless and safe investment, especially when the economy is shaky. When the price of gold starts to increase faster than normal, it\u2019s a sign the economy could be wobbling. The price of gold rises in times of economic instability as people seek safe, long-term investments.<\/p>\n

Global Economic Policy Uncertainty Index<\/h3>\n

The Global Economic Policy Uncertainty Index<\/a> measures how uncertain people feel about the global economy in various countries. The index is calculated using:<\/p>\n