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Rosy Or Bleak?: The Recession And The Housing Market

Rachel Burris20-Minute Read
September 19, 2020

Since COVID-19 swept the nation, the housing market has been shrouded in uncertainty. In the spring, shelter-in-place mandates brought the real estate industry to a screeching halt. However, as restrictions have been lifted, real estate sales have soared in suburban markets.

In those areas of the country, prices have climbed, bidding wars have become routine and homes have flown off the market mere days after being listed. While these robust market conditions are encouraging, we are a nation still scarred from the Great Recession. Thus, it’s hard not to wonder if these are the signs of an evolving housing bubble.

If they are, many more questions need to be addressed. For instance, how long would it even take for the real estate market to recover if there was another housing downturn? To gain insight into what the future could hold should our rosy market outlook suddenly turn bleak, we decided to take a look at where the recession left us last time.

How The Housing Market Has Responded To The Past and Current Recession

Common sense tells us there should be a positive correlation between the economy and the housing market. When the economy is weak, home values should drop. Yet, our country is currently facing a recession, and home values are rising, at least in suburban markets.

inner percent change chart

This negative correlation was not witnessed during the Great Recession. Even a decade after the downturn ended, it was unclear whether home values had rebounded. To study this possibility, we sourced data from the Council for Community and Economic Research to rank the most expensive cities in the United States and examine housing costs across the country.

After comparing home values in the second quarter of 2009 to the second quarter of 2019, we discovered that the national housing market had recovered but not appreciated. On the city level, however, we found an extreme disparity in how home values had changed in that 10-year period.

In the U.S.’s most expensive cities, the housing market experienced unsustainable growth. In the least expensive cities, homes hadn’t rebounded, and the extent of their depreciation didn’t directly correspond to the area’s cost of living.

median home value chart

Since COVID-19 forced the country into the current recession, the government has taken measures to ensure that we don’t see the wave of foreclosures that we did after the housing bubble burst. Lifestyle changes and record low interest rates are driving demand in suburban markets where the inventory is low, and prices continue to rise. Home prices in urban areas are dropping, but they may balance out when a vaccinated population can once again enjoy the amenities cities have to offer. 

The Great Recession And The Housing Market

Real estate market trends vacillated wildly over the decade following the Great Recession. After the housing bubble burst and the financial crisis swept the nation, millions of Americans defaulted on their mortgages and were forced into foreclosures. The Great Recession had a crippling effect on home values across the country. After 18 months, the downturn finally came to a close at the end of the second quarter of 2009.

Ten years later, the country was in the midst of its greatest period of economic expansion; yet, it was still unclear whether home values had appreciated since the end of the recession. To determine whether the housing market had recovered, we decided to review how home values changed in U.S. cities between the second quarter of 2009 and the second quarter of 2019.

 

Did National Home Values Rebound In The Decade Following The Great Recession?

United States stats

According to the St. Louis Federal Reserve, the gross domestic product increased by 49%, and the unemployment rate decreased by 5.8% between the second quarters of 2009 and 2019. However, the economic expansion that our country experienced over those 10 years was not reflected in the national housing market. Over that decade, inflation increased by a total of 19%. So, although it appears that national home values rebounded in the decade after the 2008 recession, the $50,000 increase in median home values across the U.S. can be accounted for by inflation alone. Therefore, property values did not actually appreciate in the decade following the Great Recession. 

 

Did Home Values Rebound In The 5 Most Expensive Cities In The U.S.? 

On a national level, home values may appear to have been stagnant, but that’s not the case when you examine prices on a city level. In 2019, the most expensive cities in the U.S. in ascending order were Washington D.C., Brooklyn, Honolulu, San Francisco and Manhattan. For these cities, home values appreciated at a much faster rate than inflation in the 10 years that followed the Great Recession.

5. Washington, District of Columbia

Washington D.C. stats

According to the U.S. Census Bureau, the population of the nation’s capital increased by more than 100,000 people in less than a decade. However, as Washington, D.C. grew to include over 700,000 residents, the housing supply struggled to follow suit. The city’s building restrictions date back to 1910 when Congress passed a law to limit the height of new developments to 20 feet more than the width of the building’s adjacent street or avenue. Since buildings are restricted to roughly 11 stories, residents have suffered from limited housing options. As a result, the D.C. housing market has consistently favored sellers and led home values to escalate. In 2019, the city’s median home value was over $1 million and 3.4 times the national average.

 

4. Brooklyn, New York

Brooklyn New York stats

Brooklyn did not experience the same level of appreciation in home values as other cities on this list, but that doesn’t mean housing was any more affordable. Home values in this New York City borough were steep but have been consistently so for the last decade. As Brooklyn has grown in popularity, neighborhoods farther away from Manhattan have continued to gentrify. So, individuals, who’ve been priced out of more expensive neighborhoods, have found more affordable homes in areas of Brooklyn, like Crown Heights, Sheepshead Bay and Bedford-Stuyvesant. This expansion helps to explain why Brooklyn home values did not appreciate at the same rate as the nation’s other priciest cities despite the fact that the median home value was 4.3 times the national average in 2019.

 

3. Honolulu, Hawaii

Honolulu Hawaii stats

In 2019, Honolulu’s median home value was nearly 4.5 times the national average and appreciated more than almost any other city in the United States. The city’s high quality of life caused housing to be in great demand. Still, the tremendous increase in home value is more attributed to Honolulu’s limited housing supply. New construction has been a problem for the city, given that Honolulu has a rigorous review process for new residential developments. The city has far more regulations than any other metropolitan area within the country. Furthermore, 92% of the 50-kilometer area that centers around Honolulu’s downtown business district cannot be developed. With housing so scarce, urban Honolulu’s prices skyrocketed.

 

2. San Francisco, California

SanFrancisco, California stats

San Francisco residents have had to contend with high housing prices, but their salaries have helped compensate for the added expense. As a tech hub, the Bay Area benefited from a median household income of $104,552. However, with a wealth of high-paid software engineers buying up real estate, home values in San Fran also rose considerably. In 2019, the city’s median home value was 4.3 times more than the national average because the housing market had a limited supply that couldn’t keep up with its demand. Low inventory was the result of both topographical and legal restrictions regarding new construction. Since the city is surrounded by water, San Franciscan developers can only build up. However, zoning laws in most of the city’s districts prevent new developments from being built above 40 feet.

 

1. Manhattan, New York

Manhattan, New York stats

As the most expensive city in the U.S., Manhattan’s median home value of $2,045,349 was 6.5 times the national average in 2019. Manhattanites paid $1,733,422 more for their homes than the average American – this difference alone is actually greater than the median home value of any other city in the country. Despite the fact that home prices had appreciated by just over 57% since 2009, Manhattan was in the midst of a buyer’s market in 2019. There was an influx of apartments being listed, but buyers weren’t biting, given that sellers had been hesitant to budge on price. Meanwhile, in the luxury market, news that mansion taxes (additional transfer tax on units purchased for over $1 million) would soon increase spurred a record number of closings. So, it appeared that home prices were on the verge of dropping. This growth was unsustainable, even for the ritzy New York borough. After all, Manhattan’s median household income was $82,459, which was only $22,166 greater than the nation’s.

Did Home Values Rebound In The 5 Least Expensive Cities In The U.S.?

In 2019, the least expensive cities in the U.S. in ascending order were Joplin, Muskogee, Kalamazoo, McAllen and Harlingen. Unlike the most expensive metropolitan areas, home values in these cities depreciated to varying degrees. Although housing costs are a huge determinant of cost of living, you’ll notice that just because a city was more affordable than another didn’t necessarily mean its home prices were cheaper.

 

5. Joplin, Missouri

Joplin, Mississippi stats

Although Joplin was ranked the fifth least expensive city in the U.S., it had the lowest median home value of any other city. In Joplin, property values were 37% below the national average in 2019. The city’s home values took a catastrophic blow over that decade due to the EF5-rated multiple-vortex tornado that demolished the city on May 22, 2011. According to a housing market analysis conducted by Novogradac & Company LLP, the tornado killed 162 people, destroyed 500 commercial properties and ravaged well over 4,000 residential properties. The devastation impacted more than 33% of the city. Although Joplin residents banded together and worked tirelessly to rebuild the city, many decided to relocate. While many homes remained neglected, construction tapered off in the last few years of the decade, making it challenging for buyers to find homes available in their price ranges.

 

4. Muskogee, Oklahoma

Muskogee, Oklahoma stats

Muskogee is another city where property values suffered due to major natural disasters over the years. The city is no stranger to storms that have caused damage to homes and businesses. However, in late May of 2019, the Arkansas River rose to over 45 feet, nearly exceeding the record crest. The historic rainfall caused hundreds of road closures, 833 properties to flood and 500 families to lose all their belongings. Muskogee County was faced with around $250 million worth of damages, and with the impact that the flooding had on local businesses, the unemployment rate increased by 2%. Although Muskogee’s property prices only fell by under half a percent in that decade, the median home value was still 20% below the national average.

 

3. Kalamazoo, Michigan

Kalamazoo, Michigan stats

Although the third least expensive city in the U.S. in 2019, Kalamazoo’s home values had the fourth-highest amount of depreciation of all cities in the country. The areas of the city to the north and east had been greatly impoverished, being populated by older, less educated residents. Yet, Kalamazoo’s downtown area had become more popular with the younger generation, causing the average age of the city to decrease as the level of education increased. Even though Kalamazoo’s downtown had begun to pick up, the younger residents were not buying homes. So, while rents in the downtown area had been increasing, home prices had been decreasing throughout Kalamazoo, to the point where the city’s median home value was 31% below the national average.

 

2. McAllen, Texas

McAllen, Texas stats

The median home value in McAllen was 30% below the national average in 2019, having depreciated by 13.6% over the decade. Among the reasons for the drop in home values is the fact that Mexican citizens no longer felt welcome in the city. McAllen is a border city, and according to the U.S. Census Bureau, 85.3% of its 143,268 residents are Hispanic. The city’s close proximity to Reynosa, one of the most dangerous cities in Mexico, once led many Mexicans to buy property in the area in order to escape the drug-related violence they experienced in their hometown. Yet, with political tension rising due to debates over the border wall, down payments were higher and financial scrutiny was far more intense for Mexicans in 2019, causing fewer citizens to invest in McAllen.

 

1. Harlingen, Texas

Harlingen, Texas stats

Just 35 miles away from McAllen, Harlingen is another South Texas border city that has struggled. Although Harlingen was the least expensive city in the U.S. in 2019, its median home value was higher than seven other cities in the country, including Joplin and Kalamazoo. Still, the median home price was 30% below the national average. According to the U.S. Census Bureau, the median household income in Harlingen was $38,800, and 30.2% of residents lived below the poverty level. For the United States as a whole, the median household income was $60,293, and the poverty rate was 11.8%. So, Harlingen residents made around $20,000 less than the average American and were 2.5 times more likely to live in poverty.

Which Cities Had The Greatest Change In Home Values?

While these two cities may not have had the highest or lowest cost of living in the U.S., their home values shifted tremendously in the decade after the Great Recession. Between 2009 and 2019, Plano, Texas experienced the greatest appreciation in home values, while Fort Wayne, Indiana showed the greatest depreciation.

 

Plano, Texas

Plano, Texas stats

In Plano, Texas in 2019, the cost of living may have been only 7.2% higher, and the median home value just 1.4 times greater than the national average, but the housing market was booming. Thanks in large part to the influx of major corporations like Frito-Lay, Toyota, Pizza Hut and Keurig Dr Pepper, the median home value in the area increased by nearly 82% in the 10 years following the recession – and that’s even after adjusting for inflation. However, there were signs that suggested that this growth was unsustainable. According to Community Impact Newspaper, the average home spent 41 days on the market from 2018 – 2019, which was 10 days more than the previous year. The number of homes sold also dropped by 11% over the course of that year, with 386 fewer homes sold in 2019 than in 2018. So, it appears this rapid appreciation was beginning to slow down.

 

Fort Wayne, Indiana

Fort Wayne, Indiana

Fort Wayne is the second-largest city in Indiana, after Indianapolis. While home values in Indiana’s largest city also depreciated, the median home value in Fort Wayne dropped by 27% more than it had in Indianapolis. The city’s extreme depreciation was due to the fact that Fort Wayne was still struggling to recover from the Great Recession. Thousands of homeowners lost their homes after the housing bubble burst. In 2019, the median home price was $213,850, and, according to the U.S. Census Bureau, the median household income was $48,023, making them respectively 31% and 20% below the national average. Although sales struggled, the median monthly rent was $781 in 2019, which is 1.2 times what it was in 2009.

The COVID Recession And The Housing Market

Foreclosure filings are lower than they have been in over a decade. In the first half of this year, 165,530 properties went into foreclosure, which is 87.6% lower than the first half of 2008, according to data released by ATTOM Data Solutions. By providing a moratorium on foreclosures and evictions for borrowers with federally backed mortgages, the CARES Act has undoubtedly helped keep the current numbers low.

 

How Does The COVID Recession Differ From The Great Recession?

Once the forbearance period ends – which is currently set for January 1 – we can expect a wave of defaults and foreclosures. However, even if there’s a significant increase next year, there will still be considerably fewer than the number of foreclosures that resulted from the Great Recession. The reason for the significantly lower number of distressed properties stems from the distinct differences between the COVID recession and Great Recession, including how quickly the government has reacted to the crisis.

Before the housing bubble burst, lenders had been extremely lax about credit requirements and had permitted borrowers to take out loans without providing any down payment. Home values had taken a huge hit, and homeowners had little to no equity built up in their homes. These factors came together in a perfect storm, which created little incentive for homeowners to keep up with their mortgage payments. This environment dramatically differs from today’s housing market.

“Housing markets have adapted well post the Great Recession. Home builders have been cautious to manage supply without flooding the market. Lenders have become cautious and have restricted risky mortgages,” says Dr. Vivek Sah, director of the Lied Center for Real Estate, Lee Business School, University of Nevada, Las Vegas. “Appraisals are much more conservative and more regulated now (and hence unbiased). There is actual demand rather than speculative. In essence, markets are more robust in the present environment than before.”

Outside of densely populated, urban areas, much of the country is experiencing a hot seller’s market. The lifestyle changes triggered by COVID-19 have galvanized much of the employed population to start searching for new homes. With millions of Americans working from home and engaging in remote learning, there is a desperate need for more space. Furthermore, after spending more time in their homes than ever before, many have begun to see the flaws in their current residences and yearn for something new.

With bidding wars becoming increasingly common, the strength of the country’s housing market means home prices are rising. Unlike during the mortgage meltdown, homeowners, who are at risk of defaulting, have the ability to avoid foreclosure by selling their properties. Short sales are far less likely, as homeowners have less leverage and more equity built in their properties. Moreover, since homes are currently worth more, their equity is actually increasing, making it more likely that they’ll strive to continue making their mortgage payments.

 

Is The Nation In The Midst Of A Housing Bubble?

Typically, the housing market follows the economy. When we find ourselves in a recession, we expect real estate prices to drop significantly. While stay-at-home mandates initially halted real estate transactions, the residential market quickly skyrocketed once measures were lifted. The fact that the market doesn’t reflect the current economic conditions we’re experiencing begs the question: Are we in the midst of a housing bubble?

“Certainly, a bubble could be forming in some segments of the market,” says Dr. Robert R. Johnson, professor of finance, Heider College of Business, Creighton University. “The potential bubble is fueled by two factors: 1) the desire to move out of urban areas and into less crowded, suburban areas [which lack inventory]; and 2) the historically low interest rate environment fueled by the expansionary monetary policy of the Federal Reserve to buttress the economy.

With the 30-year fixed mortgage rate fluctuating between high 2% and low 3%, Johnson notes that interest rates, in particular, may be causing housing prices to become overinflated. “Since November 2018, when it was 4.94%, it has fallen more than 2 percentage points. The 30-year fixed-rate has never been this low since Freddie Mac began tracking mortgage rates in 1971,” he adds.

The coronavirus may have caused the unemployment rate to rise higher than it did during the Great Recession – and reach the highest levels the country has seen since the Great Depression – but the fears and needs incited by the virus are creating a frenzy in the housing market. Thus, it is possible that although prices appear to be overinflated, the demand for housing is legitimate.

“We are not in a housing bubble. Our market is a function of supply and demand. The demand is real, based on need,” says Tammy Felenstein, executive director of sales, Stamford, Connecticut for Brown Harris Stevens. “The demand is not based on laxed lending requirements that give unqualified buyers the ability to buy homes they shouldn’t, as was the case in 2005 – 2006. Inventory is low, and interest rates are low, but since requirements continue to be strict, only qualified buyers are purchasing.”

While the low inventory is driving up prices, the low interest rates are keeping properties affordable. Therefore, the limited supply coupled with the low interest rates are intensifying the demand. Although home prices appear to be inflated, they are, in fact, adhering to the principles of supply and demand.

“Real estate was a big part of causing the Great Recession. In this downturn, real estate is going to help lead us out of the recession,” says Felenstein. “I don’t see a housing downturn approaching. I see a healthy real estate market that is the engine to a healthy economy.”

How Are U.S. Cities Weathering The COVID Recession?

Because of their population density and lower square footage, cities certainly haven’t been experiencing the same housing boom as suburban areas. City dwellers have been hit harder by the virus. Of course, many have become interested in escaping apartment buildings with their shared common areas and cramped living conditions.

However, reports on this trend have tended to focus on the histrionics. Arguments have arisen over whether cities – particularly New York City – are dead or dying because of the apparent mass exodus that’s been occurring. Urbanities may be fleeing, but there’s no indication that this flight is anything more than temporary.

It’s important to keep in mind that COVID-19 has rendered the qualities and amenities, which furnish cities with vibrancy, transitorily dangerous and off-limits. Once there’s a vaccine, there’s no reason that urban environments won’t spring back into favor.

At this moment, we can only speculate as to how cities will weather the COVID recession. Unfortunately, reports for the second quarter of 2020 can’t be used to gauge the market, given the high percentage of contracts that were signed before the quarantine and the fact that the industry was forced to shut down through the spring.

Yet, it’s evident that residential sales in Manhattan were dropping prior to COVID-19, compensating for a market that was overinflated back in the second quarter of 2019. According to Brown Harris Steven’s Residential Market Report, the median sales price in Manhattan for the second quarter was down 22.7% from a year ago, and the number of reported sales was down 56%.

“I believe prices have been going up for years and finally leveled off pre-COVID. In Manhattan specifically, right now, you are seeing a buyer’s market as interest rates are at a historic low, and serious buyers are taking advantage of this,” says Nicole Gary, associate real estate broker with Keller Williams New York City. “While pricing is increasing in the suburbs surrounding Manhattan, there are deals to be had in the city. What happens in NYC affects the rest of the country’s economy.”

Thus, instead of writing off cities altogether, we should remember the extreme appreciation that the five most expensive cities experienced in the decade following the Great Recession. We may not have anticipated the pandemic and the effect it would have on our economy, but those bloated markets indicated that another recession was likely approaching.

What Can We Learn By Comparing This Recession To The Last?

So, what can we learn by examining whether the housing market rebounded in the decade following the last economic downturn? While there are cities that were fortunate enough to experience appreciation in home values in the decade that followed the Great Recession, less than half of the 207 cities studied benefited from rising housing prices. Despite undergoing the nation’s longest period of economic expansion, many areas within the United States were still recovering from the last recession as we embarked upon this one.

Prior to the housing market collapse, people viewed residential real estate as an infallible tool for accumulating wealth. There was no fear of losing money because appraisals were unchecked and constantly coming in higher. Yet, seeing how little the majority of real estate appreciated a decade after the housing bubble burst should give would-be real estate investors pause.

“People should understand that residential real estate should be looked at more as a consumption good instead of an investment,” says Johnson. “Too often people make the mistake of spending too much of their income on a house and effectively ‘crowding out’ other investment opportunities.”

To explain why real estate shouldn’t be considered a safe investment, Johnson quotes the Nobel Laureate economist Robert Shiller: “Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style … So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000s.”

People are often so caught up in the idea that their investment will appreciate that they don’t think about how their property itself will depreciate simultaneously. The physical structure must be maintained and repaired over time, and that costs money. Even if you sell your home for more than you purchased it for, you still need to subtract the cost of all that work from the sales price to determine your profit.

Does That Mean We Shouldn’t Buy Real Estate?

Just because real estate isn’t a foolproof investment doesn’t mean it’s necessarily a bad one. Sure, new homes are continually being built, which means that better homes will always be on the market when you go to sell yours. However, one thing we can’t make more of is land. So, while homes depreciate, land maintains and can even increase in its value.

So, how is investing today different than during the housing bubble? Individuals aren’t purchasing real estate they can’t afford right now. They’re not over-leveraging themselves, thinking it will ultimately enable them to get rich quick. Lenders won’t let them. We’ve tried to learn from our mistakes and tighten the reins on credit.

“This downturn is very different than the Great Recession. Back then, we had subprime lending, an overproduction of inventory and relaxed lending policy. The collapse of the real estate market played a very big role. That is not the case now,” says Felenstein. “In fact, as government spending increases with these massive stimulus packages, so does the threat of impending inflation. Real estate is the safest haven for your money.”

As the government continues to print money to keep the economy running, the prices of goods and services will naturally rise. Your money won’t buy the same thing tomorrow that it’s able to buy today. As Felenstein points out, parking your money in real estate can protect it from losing value, but that doesn’t mean it will.

There are people who’ve made a fortune through real estate, but they didn’t do it by purchasing property haphazardly. Buying real estate is only a good investment when you buy right. You must ensure you’re purchasing quality construction in a coveted location. Most importantly, you must make sure you’re not buying at the top of the market.

While some good deals are popping up in cities across the country, suburban markets are overheated. Of course, there’s an argument to be made that low interest rates make suburban purchases more affordable. Even if prices are inflated, buyers will end up spending less on interest over the life of their loans. Therefore, the overall cost of housing could balance out. Yet, that doesn’t mean buyers are getting a good deal, one that will make their purchase ultimately profitable.

If you don’t understand the market and know how to analyze deals, you should purchase real estate, as Johnson says, for personal consumption. Buy a primary residence that you can enjoy living in. Even if it doesn’t rapidly appreciate in value, it’s a good way to pass on wealth to your heirs.

Methodology

For the purposes of this study, we consulted data collected by the Council for Community and Economic Research. Each quarter, C2ER releases a Cost of Living Index that analyzes the prices of housing, utilities, health care, transportation, groceries and miscellaneous goods and services in cities across the United States to determine how each metropolitan statistical area compares to the national average.

In order to investigate how home values have changed over the decade, we compared the data that C2ER collected for the second quarter of 2019 to the data they collected for the second quarter of 2009. Since C2ER acquires data from the chambers of commerce (or similar organizations) of the cities that are willing to participate each quarter, the number of cities included varied from 2009 Q2 to 2019 Q2.

To compensate for the discrepancy, we eliminated all cities that were not included in both surveys. Therefore, while 320 cities were included in 2009, and 255 cities were included in 2019, only 207 cities were examined for the purpose of this article. Once the two datasets were equivalent, we ranked the cities according to their cost of living.

Home value is a relative measure that is directly determined by how much buyers are willing to pay for property at a specific point in time. Meaning, the best indicator of home value is an area’s median home price. Therefore, to determine each city’s home values, we analyzed C2ER’s data on median home prices.

Using this data, we determined the percent of change for home values from 2009 – 2019 for each city and adjusted it for inflation, based on information taken from the U.S. Bureau of Labor Statistics’ CPI Inflation Calculator.

To gain a clearer picture of the context in which home values have fluctuated in these cities, we sourced data from the U.S. Census Bureau. Any data presented on population size represents 2019 estimates, while all other Census data is based on 2018 figures.

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Rachel Burris

Rachel Burris is a writer covering topics of interest to present and future homeowners, as well as industry insiders. Prior to joining Rocket Companies, she worked as an English teacher for the New York City Department of Education and a licensed real estate agent for Brown Harris Stevens. She holds a bachelor's degree in creative writing from Bucknell University, a postbaccalaureate certificate in psychology from Columbia University and a master's degree in English education from Teachers College, Columbia University.