Anyone whose been paying attention to the real estate market will know that the dreaded word ‘recession’ has been rearing its ugly head recently. New York prices have been steadily declining for the past two years, and there is now a palpable feeling that another recession isn’t far away. Most people can still remember the last crisis a decade ago when the housing market collapsed and took the whole economy with it. The question many New Yorkers will be asking themselves now is what will happen to property prices and rents if the current downturn becomes a full-blown recession? Let’s take a look at what the current predictions are for the market and what you can do to prepare for the future.
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The Bad News: A Recession is Coming
Let’s get the worst news out of the way first; a recession is coming. It’s not a question of if but when. The more pessimistic economists say it could happen as early as the first quarter of 2020, while the more optimistic put it off to some time in 2021. Predicting when exactly it will strike is extremely difficult, but all the indications show that a recession is on the horizon. These indications being:
The economic cycle is past its due date
The thing to understand about our economy is that it operates in cycles. There are periods of downturns, followed by recovery, expansion, oversupply, and downturns again when the cycle starts all over again. Data from the past 165 years show that expansion phases have never lasted more than ten years, except this one. We’ve just past the 10-year mark on when we started to recover from the Great Recession, and the feeling among many economists is that we’re due for a reset.
Bonds indicate a bubble
Bonds are the backbone of the financial system, and there are strong reasons for believing it’s in a bubble. 17 trillion reasons to be exact. That’s the dollar amount for how many negative-yielding bonds are in the market right now. If the bubble pops, then the Fed is likely to prop it up by injecting it with cash. But how much they can do this before the U.S. dollar becomes devalued is an open question. Even if it doesn’t pop, there’s still the matter of the inverted yield curve, which happened earlier this year. This is when long-term rates for U.S. government bonds fall below short-term rates. A high indicator that weaker economic times lie ahead. The situation is unlikely to improve unless interest rates rise.
Already low-interest rates are continuing to drop
The current trade war with China, coupled with a slowdown in manufacturing production and declining mortgage originations, has led to the Federal Reserve continuing to lower interest rates as a way to encourage market growth. However, this is only delaying the inevitable. The federal funds rate is currently 1.5% to 1.75% after a quarter of a percentage point was cut on Oct 30, 2019. This means rising affordability, but it’s also bad news for the bond market.
Subprime Mortgages are back
Subprime mortgages, the prime culprit of the 2008 crash, have made a slow comeback. While they may not be called subprime mortgages anymore, this method of lending is still practiced. The Dodd-Frank Act and Consumer Protection Act work as stopgaps against any repeat of 2008, but the risks have been steadily rising over the last few years. If a significant recession comes, then it will be exacerbated by the subprime loan market.
The Good News: It (likely) won’t be as Bad as Last Time
While the last recession was bad enough to give PTSD to those affected by it, there are good reasons for believing this one won’t be as bad. An important thing to understand about what happened in 2008 is that property prices didn’t drop because of the recession. Instead, it was the housing market collapse that caused the recession. The situation is different this time, and the housing market isn’t the leading force it was during the subprime crisis. Various factors are driving this coming recession, and the expectation is that while there will be a slowdown and layoffs, there won’t be the massive drops in property prices or a flood of foreclosures like we saw last time.
What this means for Buyers and Investors
Prices have been steadily falling in NYC’s residential market since 2016, and there is a strong feeling that this slow grind will continue. However, there’s also a feeling that it can’t keep up for much longer. Market conditions are clearly in favor of buyers right now. But curiously enough, very few are taking the bait. This may be because they’re holding out for steeper price falls or are afraid of another foreclosure crisis.
But foreclosures aren’t expected to be as much of a problem this time. Despite the slow comeback of subprime mortgages, they won’t have the same impact they did in 2008. Lending laws are now tighter, with only the most qualified buyers being approved for a mortgage. Homeowners today also have a record amount of equity in their homes, meaning that if they do lose their job and can’t keep up with their mortgage payments, they’re more likely to put their property on the market rather than go into foreclosure. Additionally, since property values aren’t expected to fall as far this time, fewer properties will find themselves underwater on their mortgage.
If you’re holding out for steeper price cuts, then you could miss a golden opportunity to buy now. NYC’s co-op inventory plays an important role in cushioning any recession, and they comprise about three-quarters of the residential market. Because of their strict requirements for buyers having plenty of post-closing liquidity, they can usually ride out any recession. This helps to flatten out the market so you won’t see any huge corrections as you would in the stock market.
If you’re going to make a purchase, then make sure you have cash reserves left over and buy a quality property in a good location. A smart purchase made at the right time can weather any storm. Recessions don’t last forever, and if you can keep up with your monthly payments, you’re likely to fare well post-recession Understand also that recessions are always coming. If you allow fears of a recession to paralyze your decision making, then you’ll never make it as an investor or get that dream home. Investors who already have some properties should focus on building a portfolio that can survive a recession. If you’re over-leveraged, then eliminate some debt to achieve a more secure leverage ratio. You should also aim to build up your cash reserves.
What this means for Sellers
In any downturn, the sellers are usually the last to know, or rather they’re the last to acknowledge it. This is definitely the case right now, as many sellers are still refusing to drop their prices. The way things are looking now, those who can hold onto their properties until the recession comes and passes would be wise to do so. In the real estate game, it’s always the long-termers that make the most gains. If you do have to sell, then make sure you hire a qualified listing agent that can actively promote your property and find you a buyer. It may also be worth hiring a professional staging company to prepare your listing for an open house.
What this Means for Renters
The majority of New Yorkers are renters, and any recession is sure to affect them as well. The current uncertainty in the market means many people who could buy are choosing to wait and keep renting for now. This is making an already competitive rental market even more competitive, which puts landlords in a good position since they don’t have to offer as many concessions. But when the recession does arrive, and fewer people can afford high prices, we’re likely to see more landlords provide concessions. That’s what most of them did last time, and we can expect to see it again. Renters can try taking advantage of this to improve their rental circumstances.
It’s impossible to know when exactly the recession will strike or how severe it will be. Most of the predictions say it’s not far off and that it won’t be too bad, but even clever predictions are still just predictions. It’s up to you as a homebuyer, seller, or investor to conduct your own due diligence and come to your own conclusions. The more prepared you are, the better you can weather the storm.