Fear doesn’t look good on you. There are folks out there warning an economic collapse is imminent, and I highly recommend not giving them the time of day. We’re currently in the recovery period from one of the shortest economic contractions on record.
Don’t hear what I’m not saying. Things are not all roses and candy corn at this point, so I’m not recommending giving out sanitized high-fives just yet. Employment figures have a long road of recovery ahead. But our economy is expanding and the housing market is red hot right now.
So, to my doomsdayer brother who is frantically pointing to dark clouds on the horizon and jabbering about the terrors of the Great Recession, I say this: Friend, the Great Recession actually prepared us well for this season.
Home Prices to Take a Bath?
Today, it only takes a whisper of the word ‘recession’ to hit a nerve in most homeowners. Thoughts and fears of evaporating home equity start spinning. For potential homebuyers, the word might create excitement about a fire sale on the horizon.
Understandably so. In Housing and The Great Recession, the Stanford Center on Poverty and Inequality and The Russell Sage Foundation discuss the shocking fact that between 2006 and 2012, $7 trillion of home equity vanished and 22% of homeowners ended up ‘underwater’ on their mortgages.
The same report goes on to say, however, that “such a housing collapse is not a typical recession experience. We see...in the four prior recessions, there was either a slight downturn in home equity or a slight reduction in the rate of increase. None of these prior recessions comes close to the precipitous downturn in home equity experienced in the Great Recession” (emphasis added).
A major collapse in home equity did not historically go hand-in-hand with economic recessions. But the scars from The Great Recession have left many of us believing they do. And as a result, there’s been a major shift in homeowners’ attitudes toward their homes for the better.
More Home Equity than Ever
Prior to the Great Recession, many homeowners came to view their homes as giant piggy banks. The soaring home prices, fueled by heated demand from credit un-worthy borrowers, enticed large swaths of homeowners to take advantage of Home Equity Lines of Credit (HELOCs) and cash-out refinances in order to yank equity out of their homes for funding home projects, college tuition and other big ticket items.
We all know what happened next. The upshot is that since the housing bust, the HELOC market has largely gone into decline, with the volume of home equity lines reduced by half from what they were a decade ago, according to data from the New York Fed.
In fact, today, the amount of tappable equity—the amount available to homeowners, while still maintaining 20% equity in their home—is around $6.5 trillion. That’s 2.5 times the amount that was available to homeowners back in June of 2009. Homeowners have become extremely cautious about over-leveraging their homes.
What’s more, home values have been posting massive gains during the pandemic. While other areas of our economy are rebounding at a fair clip, the housing market has become red hot, with home values nationally rising 7.8% from Q3 of last year to Q3 of this year. Seemingly not just impervious to, but fueled by pandemic factors—that is, ultra-low mortgage rates and low inventory—demand has doubled. Home prices in San Luis Obispo County have risen nearly 15% from this time last year.
Money in the Bank
Above and beyond growing home equity, savings accounts have skyrocketed since the beginning of March of this year. And it’s not simply because people have stopped spending money.
Estimated losses of personal income during Q2 of this year amounted to around $260 billion. But the government benefits, direct payments and unemployment assistance that entered the economy via the stimulus package amounted to $600 billion—that’s over $2 for every $1 lost.
Christopher Thornberg sums up the sheer flood of cash that’s hit commercial banks in his Economic Forecast for 2021, Riding the Coronavirus Coaster: “All said, it’s understandable why the FDIC is reporting one of the most dramatic surges in commercial bank account deposits ever seen– $2.2 trillion in three months. This is the dry powder that will fuel a rapid recovery once the virus is controlled.”
We’ve Already Taken the Plunge
Meanwhile, the virus persists and ramping up cases is deeply impacting economic activity. This is troubling and prolongs the healing that our economy and many of our businesses need.
However, we have already taken the big plunge and resurgences of cases appears to have not threatened our economic activity as it first did. Following the resurgence of cases in June, July’s figures showed that consumer spending only slowed, payroll jobs rose and unemployment still fell. In fact, through June, economic activity had rebounded by 9.2%.
Lead analyst for HousingWire, Logan Mohtashami, observed, “the raw shock and fear of having an active virus come into our economy, which was working from the longest economic expansion ever recorded in history, can’t be replicated.”
This indeed has been a bumpy ride with some record-breaking dips in the economic metrics. And this moment may feel like the dark, cold days of Winter in more ways than one. But record- breaking and swift rebounds have been made too, and the ‘dry powder’ has been set. Our resilience is proving itself. And Spring is coming.