2 Part Series, Part 2: Evidence of a Declining Market (Bear Market)
In part one of this series, we reviewed the 2019 market and the stances of economists who anticipate that 2020 will see a continuation of a bull market. However, some dispute these ideas and believe that we are entering into a housing bust.
If you take a look at the historical trends in the housing market, there are always ups and downs. The last downward trend was in 2008 and was predicted by economists who reviewed the phases of a housing bubble. In fact, in 1997 Professor Fred Foldvary wrote, “The next major bust, 18 years after the 1990 downturn, will be around 2008, if there is not a major interruption such as a global war.” To the surprise of many, he was correct. Therefore, by reviewing the phases of a bubble, many analysists think the next bubble will burst this year.
What Are the Phases of A Housing Bubble?
There are four phases of a housing bubble – let’s review briefly:
- Phase I: Recovery – This period follows a bust and is the time of recovery for the economy and the housing market. Vacancy decreases as companies expand their businesses.
- Phase II: Expansion – This period describes when the businesses and residents have taken up all the previously-vacant spots, and developers begin to expand the real estate market. This includes both the development of vacant land and the redevelopment of existing properties.
- Phase III: Hyper Supply – This is the first indicator of trouble and is represented by an increase in unsold inventory and/or vacancy.
- Phase IV: Recession – Construction stops, occupancy falls below the long-term average, and the surplus of inventory leads to lower occupancy and lower rents.
2020 Transition to a Bear Market
By reviewing and understanding the phases of a housing bubble, you can gain insight on why many analysists believe that we are entering the next recession.
Pricing is Unaffordable
Over the last decade, the values of homes have continuously been increasing – this is primarily due to the shortage of homes available on the market and the high demand for said homes. As a result, home prices have slowly been climbing through the years. Unfortunately, we have hit a place where the homes available are no longer affordable, even with the low interest rates.
George Ratiu, senior economist at realtor.com, assessed the 2019 market and reported that “Real estate fundamentally remains entangled in a lattice of continuing demand, tight supply, and disciplined financial underwriting…Accordingly, 2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can’t find.” He continued, “The supply of rental properties has risen in tandem with demand, while new residential construction has lagged, placing the rental market in a good position to offer alternatives for buyers priced out of their markets…However, the affordability will continue to cast a shadow over housing in 2020, as both home prices and rents remained elevated.”
Rent Control Has A Negative impact
Many states across the nation, including New York and California, are implementing new laws related to rent control to help reduce the problem of unaffordability. Unfortunately, these laws will not immediately save the market, pressuring economists to predict that 2020 will present another housing bust. As local governments dictate the amount a landlord can raise the rent each year, investors are weary of investing in those markets. Rent control actually discourages construction and often results in a decline in property values.
Although many believe that rent control promotes ownership by locals, it in fact makes it more challenging for current investors to transition out of their current investment or put the money into upgrading it.
What if the Fed Raises Rates?
Most reports have indicated that the Fed will not be increasing rates in 2020, but there is no certainty in this statement. Zillow, a leading real estate and rental marketplace, anticipates that the Fed 2020 will be the beginning of the next recession. However, rather than being a result of a downturn in the economy, they anticipate that it will be a result of the Fed raising rates because as rates go up, more buyers are pushed out of the buying pool, decreasing the demand while construction remains high.
Your Next Step Moving Into 2020
Now that we have reviewed both sides of what may happen next year, you may find yourself questioning what your next move is.
Well, as we have mentioned previously, there is no magic 8-ball. However, the trends of the past do suggest that at some point in the coming years, there will be a bust in the housing market. It may not be in 2020, or it might. The end result is that if you are interested in transacting in the next few years, you might just get started now.
If you are a homebuyer, note that interest rates are low, putting you in an optimal position to get a loan. On the other hand, if you are a seller, inventory is low, and there are buyers bidding for those homes that are available. You will want to act now because 2020 brings much to consider. We are approaching another election, Trump is still involved in the trade-war, there is escalated tension with Iran following a U.S. airstrike, and stock markets are at an all-time high. All of these variables make it uncertain how the economy and how the housing market will respond.