For many Americans, September 28, 2008 is a date that will live in infamy. While the 1941 Attack on Pearl Harbor had more human costs than the Financial Crisis of 2008, the economic cost of the crash stands on par with events that have irrevocably altered the course of American history. Many remember that fall day in 2008 as the day their perfect world lost some of its shine, and the well-hidden reality of the American economy began to poke through. But the painful consequences of rising foreclosure rates and inflated home values are one that many Americans will not soon forget. The Great Recession of 2008 took nearly all the livelihoods of everyone it touched, and many Americans today believe the economy could be about to repeat history.
While many factors led to the crash of 2008, one of the most decisive contributors was the real estate market. In the years preceding the crash, the United States economy was amid one of the most pervasive bull markets homeowners had ever seen, with the prices of goods and services continually rising. It seemed that the historically accurate notion that home prices could never decline was the driving force behind the uptick in consumer borrowing. However, it should be noted that this increase in borrowing was also driven by a variety of factors, such as low-interest rates, easy access to credit, and predatory lending. Before the housing bubble burst in late 2007, median single-family home prices rose by almost 41% percent during 2002-2006. Today, American homeowners see much of the same trends happening again, which many economists find worrying.
Almost 16 years after the financial crisis, it would be reasonable to assume that Americans now understand the implications of borrowing beyond their means and buying into the popular opinion fallacy. However, in recent years it would seem as though many prospective homeowners are falling for the same group-think problems that plagued Americans in the early 2000s. It has only been 14 years since former Treasury Secretary Henry “Hank” Paulson established the $700 billion Troubled Asset Relief Program, and housing prices have again skyrocketed. Fueled by low-interest rates and increased demand, housing prices have risen by as much as 40% since the beginning of the pandemic. While this news came much to the relief of those who predicted the end of economic days in the spring of 2020, economists today warn that the housing market could soon be headed for a correction or a decline in overall value..“Nationally, home prices could slip about 5% due to an affordability crunch brought on by higher mortgage rates and home prices,” said Mark Zandi, Moody’s Analytics chief economist. Zandi is closely echoed by the Goldman Sachs economic forecast, which predicts home prices will flatline (zero percent growth) in 2023. These predictions could particularly affect areas such as Southeast Texas and parts of North Carolina, where homes are reportedly overvalued by more than 60%.
But fears of a 2008-like real estate market crash and recession are mild, according to experts such as Jim Tyson, with only a one in three chance of the economy slipping into a recession by 2023. Furthermore, while the current housing bubble is expected to burst within the next year, recession fears today are fueled more by the recent spike in inflation. This shouldn’t necessarily ease homeowners’ fears of decreased home equity and increased mortgage rates, though. In 2008, the decline in housing prices left many “homeowners … upside down in their mortgages, meaning they owed more than their house was worth.” Fueled by the worst global credit crisis in history and soaring unemployment, many Americans in 2008 had to file for bankruptcy and subsequently lost everything.
Even if the coming recession isn’t anywhere near as grim as the events that unfolded 16 years ago, it is imperative for consumers to understand the risks that come with owning a home during a recession. If the U.S. economy does, in fact, see a downturn in 2023, homeowners should prepare for a correction due to the increased interest rates the Federal Reserve put into effect in July 2022. Most likely, this correction will present increased debt interest payments and higher costs on new loans to homeowners and prospective buyers. With the increase in interest rates, homeowners should also expect a notable decrease in the lending market as banks begin to pull back on loans in order to reserve capital and decrease risk exposure. In effect, it will become more difficult for the average American to borrow money because of stricter lending policies, which will further decrease demand in the housing market and drive down the price of homes.
While it is hard to accurately predict whether the U.S. economy will fall into a recession or how sharply home prices will decline, it is important to note that there are many ways homeowners can prepare for the unexpected trickle-down effects that come with a downturn. Primarily, homeowners can educate themselves about the risks of buying, selling, and owning during a recession. Knowledge is power and following the current thinking about where the economy is headed is a practice that everyone—homeowner or not—could benefit from. There are also a host of resources sponsored by banks, charities, churches, and other non-governmental organizations that provide relief to homeowners in need, all accessible with a quick google search. Some examples include: The Homeowner Assistance Fund, The Federal Housing Finance Agency, and Better.com
Finally, it is also important to remember that recessions don’t last forever. The economy ebbs and flows expands and shrinks. Most of the time, these expansions and contractions are quickly combated by the various tools the Federal Government has in its back pocket. Take, for example, the policies that the Federal Reserve is implementing right now to slow inflation. While this might be a forewarning of the recession experts fear coming, if history has taught Americans anything, it’s that the economy always bounces back. Nevertheless, understanding how these contractions and expansions impact the American dream of home ownership is a worthwhile endeavor. Whether you are a homeowner or not, it is important to recognize that economic recessions impact every American. Take the time to educate yourself and your peers about the broader macroeconomic trends that will influence your life, and maybe one day, you can be the architect of the next Big Short.