Side Talk: How to Talk to Your Clients About a Potential Recession
Media pundits keep saying the next one is coming, there are murmurs across popular real estate channels, and home buyers and sellers are worried. But is their worry merited? Does another recession mean another housing crisis?
In this Side Talk, Anthony Navarro, founder of Harper Real Estate, offers his perspective on the matter. He talks about how recessions have impacted housing in the past, discusses what kind of impact the next recession is likely to have on housing, and explains how to talk to your clients about all of the above.
First, it’s important to understand what a recession is, what triggers it, and why it can have such a tremendous impact on investments, real estate or otherwise. By definition, a recession is a business cycle contraction when there is a general decline in economic activity. In the United States, we're considered to be ‘in a recession’ when there are two declining quarters of gross domestic product (GDP) in a row.
GDP is essentially the total monetary value of all the goods and services produced and sold on the market within a country during a period of time. When GDP declines and a recession begins, the economy follows a similar pattern to the real estate market in a slow period. Demand goes down, the number of buyers and sellers dwindle, and less money changes hands.
So now that we understand the basics, let’s talk about what’s happened in the past versus what’s happening right now. Anthony emphasizes one point throughout the video; a recession does not guarantee a housing crisis. In fact, a recession is very unlikely to trigger a meaningful negative housing shift, much less a crisis; and here’s why.
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In its history, the United States has experienced five recessions. There have only been negative housing implications during two of those recessions.
- 1980 recession -- home values went up
- 1981 recession -- home values went up
- 1991 recession -- home values went down slightly (less than 1%)
- 2001 recession -- home values went up
- 2008 recession -- down (some over 50%)
Unfortunately, the 2008 recession was a doozy, and that’s the one today’s consumers remember. Many buyers and sellers were negatively affected by the housing crisis that followed the recession, and some may still be recovering. The important thing to remember is the fact that the 2008 housing crisis was not simply a direct result of the recession itself. It was a result of the recession in tandem with a massive mortgage meltdown.
What's Happening in 2019
We’re currently in the longest economic recovery in the history of the United States. So why could we potentially be heading towards another recession? In addition to the fact that the economy works in cycles consisting of peaks and troughs, there are three key things that are likely to trigger the next recession. If you watch the news regularly, you’ve likely heard a lot about all three in recent months:
- Trade war
- Stock market fluctuations
- Political event
At this point, it’s not so much a matter of if it will happen, but when.
What Will Most Likely Happen During the Next Recession
Experts say we’re most likely to be heading to another 2001-style recession. In 2001, there was a 25% stock market reduction, an effect that led to investors putting money into real estate. Because of this, market values went up by 5%. So how does this impact buyers and sellers?
The impact on buyers is somewhat unknown because there’s no way to know exactly if or how the net recession will impact the real estate market. That said, if the experts are right, and we see another 2001-type impact, there won’t be any massive implications for buyers to navigate. Sellers may be a bit more affected because we’re quite certain a recession is coming, and it will have an impact on consumer confidence, as it always does.
Being prepared to answer questions and being able to explain what’s happening and reassure your buyers and sellers is critical. With this video and these notes as a resource, we hope you now feel prepared to do exactly that.