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Housing Isn’t Expected to Cause the Next Recession, Here’s Why

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Although it ended years ago, the last recession still remains fresh in the minds of real estate stakeholders. Are there signs of another economic setback? Here’s what builders should know.

A Troubling Legacy

Fueled by the subprime mortgage crisis and housing market correction, the Great Recession of 2008 torpedoed thousands of businesses across multiple industries. In the real estate sector, things were especially bad, thanks in part to stricter borrowing standards that stalled home sales.

In recent years, the real estate market has rebounded in a big way. That said, limited inventories and rising mortgage rates have some real estate professionals concerned that housing may indirectly spark another recession. According to industry insiders, however, this is an unlikely scenario, thanks to a few key factors that make the modern real estate market different from the one that fueled the 2008 recession.

What Lies Ahead?

According to Zillow, there is no indication that a recession is imminent. What’s more, some key factors suggest that, even if one does occur, it will not stem from the housing market.

After polling 100 leading economists, the online real estate database company reported that most saw only a slim probability that the next recession would start within the next year. These same experts also predicted that the housing market would not be a likely cause of another recession – and that the real estate sector would see only moderate impact if a recession does occur. In fact, leading economists rank the housing market low on the list of potential triggers, behind more likely catalysts, such as a corporate debt downgrade, military action, fiscal policies, trade policies, monetary policies, political gridlock and stock market corrections.

Why Is this Housing Market Different?

Although economists have an unimpressive record of predicting the timing of the next recession, they have gotten much better at targeting specific sectors that appear to be accumulating risk.

While real estate played a central role in the last recession, the market is much different from the one that caused all the problems in 2007 and 2008. At that time, demand was fueled by a surge in newly-qualified mortgage borrowers, who opened the door for risky acts within the investment banking sector. Lax lending standards set the stage for mass defaults, which set off a chain reaction that ultimately led to a widespread economic downfall.

In today’s housing market, things are much different. Regulations are stricter and buyers no longer have access to easy financing. Stringent lending policies have led to safer deals that keep borrowers from getting overextended. While they can still invest in riskier loans, lenders must carry this risk on portfolio or sell the loans to private investors with no federal guarantee.

Although some within the industry have pushed to loosen down payment requirements, credit score restrictions have stayed pretty firm. These days, the average buyer needs to have a very solid financial standing to elevate his or her borrowing leverage.

Are there Any Reasons for Concern?

While there appears to be neither a nationwide housing bubble, nor subsequent bust, Zillow does point out that not everything is rosy. Some regional housing markets do appear to be overvalued, and certain market sub-segments are exposed to greater risk, compared to some others. Still, while the overall economic climate can shift suddenly, real estate stakeholders probably don’t have to worry about a mortgage-fueled recession in the near future, especially if banks and regulators remain committed to tight lending standards.

 

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