Dear Friends,
I hope this finds you safe, healthy and sane during these unnerving times. Wherever you have found yourselves sheltering, I send you strength and grit to weather these tough times and the resolve to know that this too shall pass.
As coronavirus stay-at-home precautions begin to lift across parts of the the country and around the globe and persist in my home of NYC, it’s only natural to wonder what impact this truly unique event will have on the housing market and the overall economy in the long-term. While the adage "past performance is no guarantee of future results" certainly applies, it can be helpful to see how economic indicators have responded to past recessions.
Like many of you, I have been spending a lot of time looking at exponential graphs and so, in that spirit, let's take a brief look at the two most recent recessions. While our current circumstances are no doubt unique, that data may lend some insight into what might lie ahead.
The S&P 500 peaked at 1,527.46 on March 24, 2001, and plummeted to 776.76, on Oct. 9, a 49.1 percent loss. Meanwhile, housing prices, as measured by the Case-Shiller Home Price Index and Condo Index*, rose throughout this period. The national home price index increased 4.9 percent, while New York City single-family homes and condos jumped 9.0 and 6.1 percent, respectively. Experts point out that spending on durable goods and housing was strong throughout this recession, driven mainly by steep declines in interest rates.
In late 2007, the subprime mortgage crisis led to a collapse of the U.S. housing market and contributed to a global financial downturn. Several of the country's largest financial institutions collapsed, including Bear Stearns, Lehman Brothers and AIG, and the auto industry also faltered. The government spent $700 billion on a bank bailout and another $787 billion in a stimulus package.
The S&P 500 peaked at 1,565.15 on Oct 9., 2007, and by March 9, 2009, it had dropped 56.8 percent to 676.53. Because this recession began with the collapse of the housing bubble and precarious mortgage lending practices, it's not surprising that home prices were affected more substantially than in previous recessions. The U.S. home price index fell 18.3 percent. The New York single-family and condo indices dropped 18.1 percent and 16.4 percent, respectively. While the damage to housing prices was significant, it was less drastic than the hit taken by the stock market.
While the Case-Schiller indices provide a consistent, long-term look at housing prices, they do have their shortcomings. Because they only track the value of single-family detached residences and condominiums using a repeat-sales methods, they omit new development stock and cooperatives from the mix. Looking at Miller Samuel Inc. date for the average and median sales prices for co-op and condo sales, we see a similar trend during both the Early 2000s recession and the Great Recession.
Moreover, Miller Samuel's graph of Manhattan average sales prices against mortgage rates shows that decreased interest rates helped to bolster home prices in multiple bear markets.
Curbed recently published an excellent FAQ on the realities of homebuying in a global pandemic and makes this astute observation: "As far as home prices dropping in the wake of recession, 2008 is the exception to the rule. During two mild recessions in the early 1980s, for example, home prices actually increased, just as they did in the early 2000s after the dot-com bust. Home prices are less responsive to recessions because housing is an absolute need, and because buyers tend to come from better financial situations that aren't as damaged by a recession."
In a review of research on pandemics and economies, Zillow also found that "economic activity fell sharply during the epidemic … but snapped back quickly once the epidemic was over." The analysis goes on to point out that this pattern "differs from a standard recession, which is a situation in which economic activity falls for 6-18 months and then recovers more slowly."
"Unprecedented" is the word most often used to describe our current situation, and it's true. These are truly unique and uncharted waters. Following our emergence from shelter-in-place guidelines, there will be many who struggle to regain employment. Businesses large and small will falter, and there will undoubtedly be a period of recovery. However, there is plenty of reason to believe that the economy and the housing market can and will recover.
There's no doubt that the coronavirus pandemic has changed our way of life. It's shifted our priorities in everything from work to love. Even when the virus subsides, the effects of this experience will be long-lasting. In particular, sheltering in place has made us think about the concept of home in a new light. I do not doubt that homebuyers who enter the market after the risk of COVID-19 is in our rearview mirror will have a whole new set of priorities in place for their home search. Life after the coronavirus pandemic will no doubt require a long period of economic recovery and personal adjustment. For many, new homes to suit our new normal will be the first step in that transition.
Please take good and care and feel free to reach out to me if you want updated data points on the market or a boots-on-the-ground view. “Life always waits for some crisis to occur before revealing itself at its most brilliant.” – Paul Coelho