Texas Border Business
President and Chief Executive Officer of The Perryman Group
Recent data regarding the state of the housing market is negative, with sales of existing homes falling to levels not seen since the aftermath of the Great Recession. According to the National Association of Realtors®, January existing-home sales across the country were down for the twelfth consecutive month to an annual rate of four million, though some regions (including the south) saw modest improvement. Nationally, sales were 36.9% lower than a year prior.
Having said that, the current cycle is nothing like the situation that emerged during the Great Recession – which is a very good thing! Although drilling down into all of the complications of the 2007 to 2009 economic and financial crisis is a task requiring more verbosity than a column permits, a quick rundown for context is worthwhile.
The economy had been growing for a number of years thanks in part to low interest rates (by the standards of the time) as the Federal Reserve took action after the dot-com downturn of the early 2000s. Home prices rose while underwriting standards decreased dramatically in an attempt to enable more people to qualify. A vibrant market for securities backed by subprime mortgages developed, even though many of the underlying loans were sketchy at best. The SEC encouraged risk-taking by large firms by lowering capital requirements. Even derivatives (side bets) on mortgage debt were all the rage.
It was a house of cards – and somebody sneezed! Interest rates began to rise, and the housing market was saturated. The subprime mortgage market collapsed, and some of the most prominent financial institutions in the world were eliminated. It took several years for total US employment to recover, and the housing market and construction were slow to recover.
This time, it’s very different. During the pandemic, the Fed dropped interest rates close to zero and trillions in stimulus money flowed into households across the nation. The housing market spiraled upward for these and other reasons. Once the Fed began escalating rates to slow inflation, the housing market’s reaction was an unavoidable consequence given its sensitivity to interest rates and their effects on affordability. Unlike 2008, this one is pretty much a garden variety housing correction.
Even with the slowdown, however, housing inventories remain very low. It is only recently that buyers had any negotiating power at all, and some backing off of sky-high prices is not all bad (they are higher than they were two years ago in most markets). The main point, however, is that this time around we should see a much more rapid and orderly return to more normal conditions than we endured following the Great Recession. The circumstances are as different as apples and elephants. Stay safe!
________________________________________________________
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 3,000 clients over the past four decades.
