“With people having PTSD from the last time, they’re still afraid of buying at the wrong time.” – Ali Wolf Director of Economic Research at Meyers Research
A cognitive bias is a systematic error in thinking that affects the decisions and judgments that people make. Some of these biases are related to memory. The way you remember an event may be biased for a number of reasons that in turn can lead to biased thinking and decision making (thank you verywellmind.com for the definition).
Americans suffer from Real Estate PTSD and many have bought into the belief that economic recessions (which we will eventually enter into) are awful for real estate and housing values. Nothing could be further from the truth, many have a developed a cognitive bias that is affecting their decision making and preventing them from buying the home they really want.
Looking back at the last five economic recessions, we see that housing prices actually appreciated through three recessions, and in the 1991 recession housing was only slightly off – down 1.9%. The clear outlier was the Great Recession - the traumatic event that is distorting many would be homebuyers decision making process.
Fear of the next recession has them waiting on the sidelines, preparing for a repeat of what we saw in 2008. Having made the assumption that since housing prices are at an all-time high, a housing crash is imminent and the prudent thing to do, is to sit and wait.
Unfortunately for those waiting on the sidelines, the next economic recession is likely going to have a much different impact on housing for a number of reasons.
According to Wikipedia – “In economics, a recession is a business cycle contraction when there is a general decline in economic activity.” Generally there has to be two quarters or six months of slowing economic activity to officially qualify as a recession.
The cognitive bias we must overcome is associating economic recessions with rapidly depreciating housing prices.
What caused the huge drop in housing values during the Great Recession was the housing credit bubble that artificially created housing demand and inflated home prices. As credit became easier to obtain than riding a bike, speculative demand for housing chased new construction homes, which signaled to home builders to buy more land and build more homes, all of which came crashing down once credit dried up and mortgage underwriters starting documenting buyer’s income and assets again.
The huge spike in mortgage credit availability starting in 2004 and came crashing down starting in 2006. What’s interesting about this chart is that over the last ten years mortgage credit availability has stayed remarkably low. Meaning the industry for the most part has learned it’s lesson and has not returned to the days of easy credit and fake demand for housing.
As of September 2019 housing prices were still increasing fairly rapidly with Idaho and Utah appreciating at the fastest pace in the nation.
Home appreciation has continued at a faster pace than many anticipated due strong economic conditions and relatively low housing inventory.
According to the National Association of Realtors, housing inventory has been declining for years and is now approximately half what is considered balanced inventory. A balanced real estate market, where sellers and buyers are on and even playing field, is widely considered to be six months of housing inventory.
Currently, most markets across the country are running less than a six month inventory, putting sellers in control of the market and allowing them to set their price where they see fit.
The question then remains, how will the housing market stand up when economic conditions and new job creation are not so robust?
History tells us that housing will likely continue to do well this go round. With mortgage credit availability in check, low inventory of available housing and lower projected interest rates ahead, the market should continue to appreciate at a normalized pace.
We have already seen evidence of this over the last year. Interest rates peaked in late 2018 and are down roughly twenty five percent, which means mortgage payments are down roughly the same.
As interest rates come down, homes become more affordable, which increases demand for housing. As we enter the next recession, the Federal Reserve will likely continue reducing short term interest rates and mortgage rates are likely to follow.
This in turn, will incentivize more first time buyers to enter the housing market, freeing up cash for move up buyers to buy the home they really want and can now afford due to lower mortgage interest rates.
I’ll leave you with this chart and a question.
Has your thinking and therefore your judgment and decision making, been impacted by the Great Recession? Are you still making decisions based on that traumatic time of your life?
If so, I’d ask you to reconsider based on a longer view of history, that’s taught us housing in the U.S. is likely to do quite well throughout the next recession.
Let us know if you have any questions, we’re here and we’d love to hear from you. We specialize in Dentist home loans! Please visit https://fairwaydentisthomeloans.com/ to learn more!
Josh Mettle NMLS #219996 is an industry leading author and ranked top 1% of mortgage originators 2018 by Mortgage Executive Magazine, specializing in financing physicians, dentists, CRNA, and other professionals with highly specialized professional loan programs. You can get more great real estate and mortgage advice here or his by visiting his book site. Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages. Josh is dedicated to helping physicians and other professionals become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.