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  • Writer's pictureRob Purnell

Why Real Estate Won't Crash in the Next Recession.

Updated: Dec 1, 2019

"Prices are going to come down, so we're going to wait and to buy at lower prices." 

I hear this regularly from buyers in the market these days. I understand why: inventory has crept up, price increases have leveled off, and buyers have the ability to negotiate for the first time in years.

But this attitude is usually based on the belief that a recession is coming and real estate prices are going to fall.  Don't bet on it.

A recession may come - it will for sure at some point - but real estate prices will not drop in any signifiant way. They could even rise. Historically real estate is less sensitive to recession than other asset classes because it's an absolute necessity. In fact since 1997, excluding the Great Recession, housing values have averaged +4.6% annual appreciation during economic expansion, and +4% during recessions,

In the Bay Area median home prices have fallen slightly in 2019. Much of that has to do with softness in the high-end luxury market. In the more affordable range (that always gets a good laugh around here) we're still seeing well-positioned homes sell quickly, often with multiple offers.

But the effects of the Great Recession of 2008/2009 is burned into our collective memory. In fact, for most of the millennial generation that was the only real recession they've experienced. So when we talk about recession, everybody expects it to be like that one.


The Great recession was an anomaly. The recession didn't cause real estate to fall, real estate caused the recession. Let's look at how different the environment is today from the run up to 2008 to understand why Bay Area real estate is likely to be quite resilient, especially in markets like Silicon Valley.

Credit: Prior to the crash credit was easy. Anyone that could fog a mirror could get a loan. Lending requirements were almost non-existent with no verification of borrowers' qualifications. And trillions of dollars of risky mortgages were bundled into bonds and exotic derivatives, and distributed throughout the global financial system. Today: none of this exists. Lending standards are quite reasonable, and skew heavily toward people with good credit, income, and assets. Lenders are required by law to verify that borrowers have the ability to repay the loan. And most mortgages today are held, or rationally securitized, by, government backed agencies or well capitalized institutions. An added bonus supporting real estate today; interest rates are at an all time low, almost half of what they were prior to the last recession. This is unlikely to change any time soon with quantitative easing continuing to roll stealthily along, and even less so if a recession materializes.

Price Bubble: Home valuations in 2008 were estimated to be almost $6 TRILLION above "fair" value, as measured by the relationship between home prices and rents. This over-valuation equated to almost 50% of GDP at the time. This price index reached 130 nationally, and for Bay Area real estate it peaked at 158! Today: the national index is slightly above par, or 100, meaning housing is considered fairly valued.

Bay Area Affordability tends to follow a fairly cyclical pattern.

The caveat to this is another, perhaps more relevant and relatable index: Housing Affordability. Except for very brief periods in the late 80s/early 90s, and right after the 2009 meltdown, the US affordability index has always been high, more so for the Bay Area. With the recent run up in prices affordability has been pushed to the limit, but this appears to be the natural cycle here in the Bay Area. I believe the affordability element has already been factored into our current market, especially Peninsula real estate, which has caused the market to flatten out but will not cause a significant drop in prices. A critical reason for this is...

Supply: Remember economics 101? Prices are a function of supply & demand. In 2008 the housing supply was plentiful and the home construction industry was booming. Houses were being snapped up as quickly as they could be brought to market.

US Housing Starts

Today: It's the exact opposite. Inventory is tight in most markets and the construction industry has never recovered to historical levels since the last recession. The most common measure of housing supply is Months of Inventory. Nationally a normal market runs 5 to 6 months of inventory, which is about where we've been (nationally) for many years. On the peninsula inventory has increased lately, but in most markets around here it barely tops the scales at 2 months! Given cost, land, and political constraints that is not going to change and inventory will remain low for the foreseeable future.

Another relevant factor here in Silicon Valley that will likely keep real estate prices relatively stable is the economy:

There are more jobs than companies can find people to fill them.This keeps employment, and incomes, high.

As long as the IPO market continues to hum along, we are regularly minting new millionaires that will all want to buy houses.

Finally, if everything I've said is wrong and real estate prices do crash, your window to snag a bargain will be small. There are a lot of very high net worth people and institutions sitting on mountains of cash. When asset prices take quick dives this cash will flood in to snap up bargains, quickly bidding prices back up. This is exactly what happened in 2009 with discount mortgage assets. It took about 3 months for most of the real bargains to disappear.

Remember, real estate is a long-term investment, and it's also your home. Trying to time the market - whether it's real estate or the stock market - rarely works out for anybody other than the big financial institutions. Find a home you love and can afford today, and work with your real estate professional to negotiate the best price and terms you can. Then, enjoy your new home!

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