Upheavals in Libya and unrest in other North African nations have led to a jump in crude oil prices. Some predict oil could stay well above $100 a barrel, leading to a price at the pump of between $4 and $5 for a gallon of gas. Business and consumers alike would feel the pinch and certainly ease up in their spending.
If that scenario comes true, it could be the death knell to a still fragile recovery, and pull us backward into another recession. I continually scan the real estate landscape for signs of stabilisation, potential recovery, or, fatefully, a second slide downward in a vicious cycle of declining prices and foreclosures.
So I asked myself what fresh horrors await the housing market if we slip into another recession? Is the housing market prepared to receive a one-two punch?
My conclusion is that the answer depends upon timing. If we were to slip backward into a recession in the near term, the housing market would take a tremendous hit as well. However, if the next recession happens three or four years from now, I believe housing will have developed fundamental strengths which put it in a position to ride through the next recession with far less bruising than this time.
Recessions always include job losses, and job losses often precipitate a rise in numbers of people who can’t afford their home. However, here are my reasons the residential real estate market of today stands on stronger legs and is better positioned to hold its ground, than prior to the 2008 financial crises.
- Strengthened underwriting standards created more legitimate home borrowers. The new home owners have greater financial integrity than many homeowners who took out loans in the last decade. Clients going through the loan application process today often complain that the questions, forms and required documents are overly intrusive and time consuming. While that may seem true to borrowers accustomed to the easy days of fast money, it is also true that the underwriting standards once again reflect common sense. The new guidelines will ensure that borrowers actually have the means and income to make their loan payments. Assets claimed on applications are now actually verified. Credit standards have toughened. Banks make loans only when they have proof of a borrowers financial health.
- Exotic loans are are a thing of the past. Option arm loans, sub prime loans and stated income loans with 80/20, 80 /10/10 and 80/15/5 formats remind me of the old nursery rhyme about a bad little boy whose sunny nature could turn on a dime, “when he was good he was very very good, but when he was bad he was horrid.”All these products lured buyers in with the promise of an easy purchase, but always had the potential to blow up in their faces. Thankfully, all these products are now in the loan product grave yard and there is no chance they will be revived.This is a key, because these loans had kicked the housing market into trouble, even before the recession’s technical signals had flashed red. As these loans began to be recast in the form of higher monthly payments, buyers holding them often found that the jump in rate suddenly made their home unaffordable and it made no sense to keep the home.
- Finally, buyers crossing our thresholds today are more serious about living n the homes they buy. People no longer look at the purchase of a house as a short term investment, which will be flipped in a few months, and then reinvested in the next house they flip. Now, buyers seem intent on securing their financial future and their family home, rather than banking on a 15% return on home value year over year. Additionally, during this last refinance wave, homeowners were not using their homes as piggy banks and cashing out.
In summary, a second recession would deliver a blow to the housing market. One cannot expect otherwise. However, this blow would be absorbed without nearly the pain suffered in the downturn of 2008-2011.This time around I believe we will have built our housing market on a foundation of bedrock, not sand, and have stepped forward on the road to making housing right for the next century. Hopefully we never go back to the old ways again.
Logan Mohtashami is a senior loan officer in his family-run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1987. LoganMohtashami.com