Home Values Usually INCREASE During a Recession
1 There is plenty of talk in the media about a pending economic slowdown. The good news is, home values actually increased in 3 of the last 5 U.S. recessions, and decreased by less than 2% in the 4th.
Many experts predict a potential recession is on the horizon. However, housing will not be the trigger, and home values will still continue to appreciate. It will not be a repeat of the crash in the 2008 housing market.
We Have an Extreme Housing Shortage
2 California has severe housing issues for both rental and home-ownership in terms of both supply and affordability. There is a shortfall of more than one million rental homes affordable to extremely- and very low-income households and California’s home-ownership rate has declined to the lowest rate since the 1940s. In addition, California needs more than 1.8 million additional homes by 2025 to maintain pace with projected household growth.
In order to keep up with the housing demand in California we need to build a minimum of 180,000 annually. Unfortunately, for the past 10 years, California has averaged less than 80,000 new homes annually. This is a significant reduction from the construction of the past. The cart below shows from 1954-1989, California averaged more than 200,000 new homes annually, with multifamily housing accounting for more of the housing production.
The production of homes increased somewhat during the housing boom of the mid 2000s, and then dropped, coinciding with the economic downturn sometimes referred to as the “Great Recession.”
The production of housing has not returned to the level required to meet the projected housing need. The Administration identified housing supply as a significant issue and worked with the legislature to find solutions. This work resulted in the 2017 Housing Package, a collection of bills that will streamline development, increase accountability for complying with housing laws, and provide ongoing funding to create and preserve affordable homes.
Rents Go Up Faster in Recessions
3 Too many people think rent control means fixed increases of 3% every year. The truth is rents typically go up even faster during recessions and can go up 3% to 10% depending on a number of factors. The increase is tied to the CPI (Consumer Price Index) which means it is adjusted for inflation and is the main reason it goes up faster during recessions. See the chart below for the historical rent controlled increases in Los Angeles.
The folks who own homes with a 30 year fixed mortgage during a recession have a fixed monthly payment that is not increasing like it would if they were renting. In addition, owning a home during a recession gives you the option of renting all or part of your property to someone else to provide you with additional income and security.
Recessions are actually the BEST TIME to own property in terms of fixed cost and potential upside in rents and appreciation. I will leave you with one of my favorite quotes from Billionaire and financial genius Warren Buffet.
Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.”