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The real estate market plays an integral role in the economy. The residential real estate provides housing for families and it is a true mark for wealth and saving for most families. On the other hand, commercial real estate creates jobs and spaces for retail, offices, and manufacturing. Therefore, real estate is a big plus for the economic growth of any as it creates revenue for millions. After suffering a huge blow with the subprime mortgage crisis 2008, any mention of a housing crisis sends tremors through the economy. 

Amid the 2007-2008 housing crisis, one term that most people can’t shake off their mind is the housing bubble and it was bad news. This is usually what happens and not just for the real estate market, when the market gets too big, without proper regulations, it is bound to fail. A housing bubble is a period in the real estate industry when prices grow to above-average such that the prices can no longer be supported. It is a matter of limited supply and increased demand that eventually falls leads to prices skyrocketing. Therefore, to counter this, there needs to be a rapid growth in supply that drives housing prices down. 

Impact of Housing on Economic Growth

A new report from CoreLogic looks at how housing is interrelated with the economic growth and how it has played a part in what economist in the country now term as the longest economic expansion on record. Since the subprime mortgage crisis 2008, the United States economy has been progressively growing to reach 121 months with the housing comprising approximately 15 percent of the GDP since 2010. This can be taken to mean one thing, that the real estate industry is key and an important indicator of economic health

In light of this revelation, I still find it quite challenging and I really don’t understand why housing improvements are still not integrated as a part of the economic development strategies. Even if in some parts it is happening, I doubt if it’s on a large scale. For a fact, we all know that this country is on a deficit of housing supply, but still, state legislators are not doing so much about it. Must housing improvement (state of housing in general) wait until the high-economic growth is attained? 

“During the last nine years, the expansion has created more than 20 million jobs, raised family incomes and rebuilt consumer confidence,” said CoreLogic Chief Economist Frank Nothaft. “The longest stretch of mortgage rates below 5% in more than 60 years has supplemented these factors. These economic forces have driven a recovery in home sales, construction, prices and home equity wealth.”

Housing construction and Economic Growth

Let’s do history a little bit, in 2018, the real estate construction contributed $1.15 trillion to the nations economic output which represents 6.2 percent of the U.S gross domestic product. Though more than the output in 2017, it was a little less than the peak of 2006 where it was $1.19 trillion. At the time, the construction was a hefty 8.9 percent component of the GDP. Since real estate construction is labor-intensive, a slight drop in the construction process was a big contribution to the housing crisis’s high unemployment rate. 

Fast forward to 2019, during the first quarter, the percentage of homes underwater went from 25.9% in the first quarter of 2010 to 4.1% in Q1 2019. In the same time, the home equity reached $15.8 trillion up from $6.1 trillion. The report also notes that home flipping has increased significantly since the great recession with 2018 recording the highest rate of 11.4%. 

An underwater mortgage is a loan with a higher principal than the free-market value of the home which mostly occurs when the property value is falling. A separate report from ATTOM Data Solutions shows that at the end of Q1 2019, more than 5.2 million U.S. properties were seriously underwater, up by more than 17,000 properties from a year ago. 

“With home prices increasing at a slower pace in 2018 than in previous years, the potential for people to climb out from mortgages that are underwater or advance into the equity-rich territory, tends to be reduced,” said Todd Teta, chief product officer at ATTOM Data Solutions. “However, only one in 11 mortgages are seriously underwater today, compared to nearly one in three during the depths of the recession. Although, if the latest trend continues, it will raise another clear signal of a market slowdown, which will be good for buyers, but not so good for sellers. But if the pattern of the past few years takes hold – with levels of underwater and equity rich mortgages turning around – it will mean the market remains strong for sellers, with fewer needing to get out from under financial distress.”

“Home prices have increased steadily since 2011, creating record amounts of home equity and putting homeowners in a good position to weather future downturns,” said Molly Boesel, Principal Economist, CoreLogic.

The fear for an Imminent Recession

Should we be expecting anything similar to the 2007-2009 housing crisis in the near future? Concerns about an imminent recession have been hurled over the media time and again and I would like to share my perspective on the same issue. The year started out strong, but for most, there’s a cloud of uncertainty and this time, no silver lining.  Financial indicators were flashing out all red signals with the stock market indicating all signs of weakness. Yields on the low-grade corporate had jumped perhaps fueled the Federal Reserve’s decision to hike the interest rates in December. To most, this was unsurprising but certainly, not welcomed. By the year’s end, most economists gave signs of a recession hitting within 12 months. However, let’s get realistic, the situation has flattened and the mood has improved. By April economists at JPMorgan’s model was putting the chances of a recession at 15 percent. 

Beyond what we currently speculate going by the economic indicators, I really don’t think we should be too happy or get too comfortable with the situation, the simple fact is the Great Recession still looms large. As the economy continues to progress, concerns over an imminent recession have been rising. A 2018 survey from the financial services company EY found that today, millennials are becoming more confident in their economic stability, but they are more pessimistic than optimistic. 42 percent of the millennials say that the US economy is excellent good while 54 percent say it is poor. 

In the housing economy, while I expect that the home prices will continue to substantially grow in the future, they will do so at a relatively slower pace. Year-over-year, home prices increased just 3.6 percent in May 2019 which is down from 4.9 percent in January. 

“We expect the housing market to enter a normalcy phase over the next 24 months,” said Ralph McLaughlin, Deputy Chief Economist. “With prices neither rising too fast nor too slow, and with a growing stream of young households looking to buy homes over the next two decades, the long-term view looks healthy.”

The Power Is Now strives to bring you the latest developments in real estate economics, mortgage lending, and the market. We are committed to making sure that you are updated with what’s happening around you and to be your resource acquisitions and sells.   We are partnered with great agents across the country and with First Bank to provide the products and programs that First Time Homebuyers need to buy a home or income property now because tomorrow it will be even more difficult. Go to www.applytobuynow.com and get started today.  The Power to buy is now!

Eric Lawrence Frazier MBA
Vice President and Mortgage Advisor of First Bank
NMLS 461807
President and CEO of The Power Is Now Inc.
CalDRE 01143484
www.thepowerisnow.com

 

 Works Cited

ATTOM Staff. “Seriously Underwater U.S. Properties Increase From A Year…” ATTOM Data Solutions, ATTOM Data Solutions, 7 May 2019, www.attomdata.com/news/market-trends/q1-2019-home-equity-underwater-report/. Accessed 25 July 2019.

Conlin, Michelle. “Millions of Americans Still Trapped in Debt-Logged Homes Ten Years after Crisis.” U.S., Reuters, 14 Sept. 2018, www.reuters.com/article/us-USA-housing-underwater-insight/millions-of-Americans-still-trapped-in-debt-logged-homes-ten-years-after-crisis-idUSKCN1LU0EP. Accessed 25 July 2019.

“Fears of Recession in America Have Faded.” The Economist, 4 May 2019, www.economist.com/finance-and-economics/2019/05/04/fears-of-recession-in-america-have-faded. Accessed 25 July 2019.

Roberts, Michael. “There’s a Growing Problem of Underwater Properties in Colorado.” Westword, 30 Nov. 2018, www.westword.com/news/growing-problem-of-underwater-properties-in-colorado-10983037. Accessed 25 July 2019.

“Special Report: The Role of Housing in the Longest Economic Expansion.” Corelogic.Com, 2010, www.corelogic.com/insights/special-report-the-role-of-housing-in-the-longest-economic-expansion.aspx. Accessed 25 July 2019.

Stewart, Emily. “Is a Recession Coming? Recessions, and the Fear about the next One Explained.” Vox, Vox, 27 Mar. 2019, www.vox.com/policy-and-politics/2019/3/27/18250823/recession-prepare-when-inverted-yield-curve. Accessed 25 July 2019.

“Underwater Mortgage.” Investopedia, 2019, www.investopedia.com/terms/u/underwater-mortgage.asp. Accessed 25 July 2019.

Welborn, Seth. “Housing’s Impact on Economic Growth.” DSNews, 18 July 2019, dsnews.com/daily-dose/07-18-2019/housings-impact-on-economic-growth. Accessed 25 July 2019.

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