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Tag: national economy

  • What America’s Past in Real Estate Tells Us About the Future

    Some experts have argued that we’re at a torrid time in the future of the US real estate market. Others have argued NYC’s housing market has been roaring, with no sign of slowing down. With inflation continuing to cripple the value of the USD, prospective home buyers face pressure to invest in tangible assets. Many Americans are realizing a home is the most sensible shelter for their savings (Nguyen, Forbes).

    However, home supplies in coveted markets are scarce. Prices are ever-climbing and competition for homes is currently relentless. That’s generally where America’s market currently stands. The main question on the minds of homeowners and prospective buyers continues to be: “Where will markets go from here?”

    Of course, no one can say with certainty. Nevertheless, select lessons from America’s history provide a blueprint for home buying at this unique historical juncture.

    Lesson from the Great Depression

    Principally, you cannot separate the national economy from the nation’s housing markets. The American economy and the American housing market are akin to dominos aligned in the same row. On some occasions, the economy is the domino at the front of the row. Whereas there were other times – the subprime mortgage crisis (Great Recession, 2008) – the housing market is first in line.

    Arguably no time in American history better exhibits the inextricable link between national economic performance and the American people’s ability to both purchase, as well as hold onto, long-term houses. As the stock market crashed in 1929, bank runs quickly ensued, and mass unemployment followed closely behind. A staggering 273,000 Americans lost their homes in 1932, plus even more suffered foreclosure in the following year. Americans simply did not have the wherewithal to keep up with mortgage payments when crushing stagflation hit.

    Some things have not changed since the onset of the Great Depression. Americans today have become far more cognizant of a future possibility of widespread economic downturn. An economy in contraction means jobs lost, wages uncollected, and mortgage payments undelivered. Ultimately, this means foreclosures.

    Current Home-Buying Spree Continues

    Yet, even facing economic hardship triggered by the pandemic, America finds itself in the midst of a record home-buying spree. This may suggest any of the following three (Nguyen, Forbes):

    • A new segment of Americans (including former apartment-dwelling city residents) are injecting unprecedented capital into newfound housing markets.
    • Home buyers see houses as a sound investment, even as many expect the economy to take a turn for the worse.
    • The demand for homes in America is far greater than supply, increasing competition for each home.

    On one hand, the Great Depression is a necessary reminder for prospective home owners to not purchase beyond their means. However, many who lost their homes during the Great Depression certainly weren’t living lavishly. This is a critical takeaway – though one we must extract – from the hardships of the late 1920s and 1930s.

    Moreover, there are notable differences between 1930’s America and 2021, which bode favorably for today’s housing market. Incentive-laden tax policies, enacted since the Depression, made it more affordable to purchase homes and make the requisite mortgage payments. Today, Americans have a variety of investment options to mitigate risk. Additionally, federal policy has prevented bank failures from the magnitude witnessed during the Great Depression.

    Lesson from the GI Bill (1944)

    Concisely, cheap credit can set you up for life (Nguyen, Forbes). If you’ve been relishing your prevailing 3% interest rates, prepare for disappointment (by comparison).

    Not long after the Allied invasion of Normandy Beach, US President Franklin Roosevelt signed the GI Bill (1944). The was portrayed as a token of appreciation to a generation of young Americans, who risked their lives at war. Upon returning home, those GIs received government-backed loans that all but guaranteed homeownership, amongst other benefits. Banks the US government deemed a guarantor were overwhelmingly likely to approve a mortgage application.

    With access to such favorable loan conditions, veterans went on to purchase 20% of all homes built after the war. GIs took full, absolute advantage of the easy credit they undeniably earned.

    Fast forward to the present. While a government-guaranteed loan might sound ideal, you truly cannot complain about today’s prevailing 3% interest rates (Campisi, Forbes). To compare, interest rates topped 17% in 1982, then hovered around 10% for significant periods in the 1990s. That means two decades ago, you’d have to pay 8% for a home loan. Quite staggering compared to today’s housing market climate, to say the least.

    To reemphasize, the prime takeaway from the GI Bill, is that favorable credit should be pounced on, while it’s available. Historically, the sub-3% rate, which we’ve seen for the vast majority of 2021, is a statistical anomaly. Based on the frenzy of home buying we’ve witnessed, it seems that many Americans and foreign investors know their history. Perhaps much more than some casual real estate investors may think.

    Conclusion

    Seemingly, the two monumental American national economic events discussed provide opposing lessons for today’s prospective home buyer. The sudden, near-total crash of the Depression-era housing market reminds us the importance of consumer’s buying within their means. The GI Bill reinforces the importance of closing on a home, especially while lending terms are favorable. Upon extensive examination, these lessons can be very much complimentary in the future.

    As we’ve noted, today, Americans find themselves at a confounding point. Interest rates are very favorable; however, the economy is riddled with inflationary concerns and general uncertainty. It’s a time both reminiscent of GI Bill-era opportunity and Depression-era anxiety (Nguyen, Forbes).

    Of any lesson investors should takeaway, it’s this: you can embrace the benefits of comparatively cheap credit while remaining within your spending means. Be sure you don’t miss out on a prime real estate investment, while interest rates are so favorable. Stray away from overextending yourself to the point where you cannot keep up with future payments, should times get tough.

    For strategically sound real estate investing, you must look to the past to help predict the future. If nothing else, for guidance. That includes the better parts, but perhaps even more importantly for investors, the worse.  

  • What America’s Past in Real Estate Tells Us About the Future

    Some experts have argued that we’re at a torrid time in the future of the US real estate market. Others have argued NYC’s housing market has been roaring, with no sign of slowing down. With inflation continuing to cripple the value of the USD, prospective home buyers face pressure to invest in tangible assets. Many Americans are realizing a home is the most sensible shelter for their savings (Nguyen, Forbes).

    However, home supplies in coveted markets are scarce. Prices are ever-climbing and competition for homes is currently relentless. That’s generally where America’s market currently stands. The main question on the minds of homeowners and prospective buyers continues to be: “Where will markets go from here?”

    Of course, no one can say with certainty. Nevertheless, select lessons from America’s history provide a blueprint for home buying at this unique historical juncture.

    Lesson from the Great Depression

    Principally, you cannot separate the national economy from the nation’s housing markets. The American economy and the American housing market are akin to dominos aligned in the same row. On some occasions, the economy is the domino at the front of the row. Whereas there were other times – the subprime mortgage crisis (Great Recession, 2008) – the housing market is first in line.

    Arguably no time in American history better exhibits the inextricable link between national economic performance and the American people’s ability to both purchase, as well as hold onto, long-term houses. As the stock market crashed in 1929, bank runs quickly ensued, and mass unemployment followed closely behind. A staggering 273,000 Americans lost their homes in 1932, plus even more suffered foreclosure in the following year. Americans simply did not have the wherewithal to keep up with mortgage payments when crushing stagflation hit.

    Some things have not changed since the onset of the Great Depression. Americans today have become far more cognizant of a future possibility of widespread economic downturn. An economy in contraction means jobs lost, wages uncollected, and mortgage payments undelivered. Ultimately, this means foreclosures.

    Current Home-Buying Spree Continues

    Yet, even facing economic hardship triggered by the pandemic, America finds itself in the midst of a record home-buying spree. This may suggest any of the following three (Nguyen, Forbes):

    • A new segment of Americans (including former apartment-dwelling city residents) are injecting unprecedented capital into newfound housing markets.
    • Home buyers see houses as a sound investment, even as many expect the economy to take a turn for the worse.
    • The demand for homes in America is far greater than supply, increasing competition for each home.

    On one hand, the Great Depression is a necessary reminder for prospective home owners to not purchase beyond their means. However, many who lost their homes during the Great Depression certainly weren’t living lavishly. This is a critical takeaway – though one we must extract – from the hardships of the late 1920s and 1930s.

    Moreover, there are notable differences between 1930’s America and 2021, which bode favorably for today’s housing market. Incentive-laden tax policies, enacted since the Depression, made it more affordable to purchase homes and make the requisite mortgage payments. Today, Americans have a variety of investment options to mitigate risk. Additionally, federal policy has prevented bank failures from the magnitude witnessed during the Great Depression.

    Lesson from the GI Bill (1944)

    Concisely, cheap credit can set you up for life (Nguyen, Forbes). If you’ve been relishing your prevailing 3% interest rates, prepare for disappointment (by comparison).

    Not long after the Allied invasion of Normandy Beach, US President Franklin Roosevelt signed the GI Bill (1944). The was portrayed as a token of appreciation to a generation of young Americans, who risked their lives at war. Upon returning home, those GIs received government-backed loans that all but guaranteed homeownership, amongst other benefits. Banks the US government deemed a guarantor were overwhelmingly likely to approve a mortgage application.

    With access to such favorable loan conditions, veterans went on to purchase 20% of all homes built after the war. GIs took full, absolute advantage of the easy credit they undeniably earned.

    Fast forward to the present. While a government-guaranteed loan might sound ideal, you truly cannot complain about today’s prevailing 3% interest rates (Campisi, Forbes). To compare, interest rates topped 17% in 1982, then hovered around 10% for significant periods in the 1990s. That means two decades ago, you’d have to pay 8% for a home loan. Quite staggering compared to today’s housing market climate, to say the least.

    To reemphasize, the prime takeaway from the GI Bill, is that favorable credit should be pounced on, while it’s available. Historically, the sub-3% rate, which we’ve seen for the vast majority of 2021, is a statistical anomaly. Based on the frenzy of home buying we’ve witnessed, it seems that many Americans and foreign investors know their history. Perhaps much more than some casual real estate investors may think.

    Conclusion

    Seemingly, the two monumental American national economic events discussed provide opposing lessons for today’s prospective home buyer. The sudden, near-total crash of the Depression-era housing market reminds us the importance of consumer’s buying within their means. The GI Bill reinforces the importance of closing on a home, especially while lending terms are favorable. Upon extensive examination, these lessons can be very much complimentary in the future.

    As we’ve noted, today, Americans find themselves at a confounding point. Interest rates are very favorable; however, the economy is riddled with inflationary concerns and general uncertainty. It’s a time both reminiscent of GI Bill-era opportunity and Depression-era anxiety (Nguyen, Forbes).

    Of any lesson investors should takeaway, it’s this: you can embrace the benefits of comparatively cheap credit while remaining within your spending means. Be sure you don’t miss out on a prime real estate investment, while interest rates are so favorable. Stray away from overextending yourself to the point where you cannot keep up with future payments, should times get tough.

    For strategically sound real estate investing, you must look to the past to help predict the future. If nothing else, for guidance. That includes the better parts, but perhaps even more importantly for investors, the worse.  

  • How Real Estate Impacts the US Economy

    Real estate, commonly known as the largest asset class in the world, would intuitively play an integral role in the US economy. Residential real estate properties provide a vital pillar of the “American Dream”: private housing for families. Separately, they can also be the greatest source of wealth and savings for many Americans. Commercial real estate (CRE) – including apartment buildings – creates jobs and rented spaces for retail stores, offices, and manufacturing warehouses. Real estate business and investment provides a source of revenue for millions of Americans.

    In 2018, real estate construction contributed $1.15 trillion to the US national economy output (BEA.gov). That accounts for 6.2% of the US economy GDP over the same year, which is quite a significant proportion. For comparison’s sake, it’s more than the $1.13 trillion in 2017, however less than the 2006-peak of $1.19 trillion. Back in 2006, real estate construction was an even heftier 8.9% component of US GDP (Amadeo, The Balance).

    While there’s some politicization over whether these qualify as “good” jobs, real estate construction is obviously labor-intensive. It plays a major force in job creation. The decline in housing construction was undoubtedly a major contribution to the COVID-19 Recession’s high unemployment rate.

    The Ripple Effect in the US Economy of Real Estate

    Construction is the only part of real estate that’s directly calculated into US GDP (Amadeo, The Balance). Nonetheless, real estate affects many other areas of the US economy, which aren’t captured by US GDP metrics. As an example, a decline in real estate sales inevitably leads to a decline in real estate prices. This effect lowers the value of all homes, irrespective of whether owners are actively selling or not. Furthermore, this causes a reduction in the overall number of home equity loans available to owners. Ultimately, the market impact is reduced consumer spending, as more homeowner cash is tied up in housing projects.

    As many are aware, nearly 70% of the US economy is based on personal consumption (BEA.gov). Consequently, a reduction in consumer spending is directly linked to a downward spiral in the US economy. The downward spiral causality is easily witnessed. This macroeconomic phenomenon leads to further drops in employment, income, and consumer spending (Amadeo, The Balance). The primary concern about the US economy falling into a deep recession stems from concerns about Federal Reserve policy. The Federal Reserve received widespread accreditation for keeping rates very low throughout the COVID-19 pandemic. Many experts argue a further cut to interest rates are still necessary (Amadeo, The Balance). There is one positive takeaway regarding lower home prices. They lessen the chance of inflation.

    Real Estate and the 2008 US (Global) Economy Recession

    Of course, no better example exists of real estate’s impact on the US economy than the 2008 recession. While very few immediately realized it, falling home prices triggered the downturn and subsequent broad, ill effects. According to the National Association of Realtors (NAR), by July 2007, the median price of an existing single-family home in the US was down 4% since its peak in October 2005 (National Association of Realtors). Macroeconomists, risk analysts, credit analysts, and economists as a whole couldn’t reconcile how concerning this was. Clear definitions and numeric parameters of recession, bear market, and a stock market correction are well standardized. The same is still, not yet true for the housing market.

    For perspective and comparison, many likened it to the 24% decline during the Great Depression of 1929. Others compared it to the decline ranging from 22% to 40% in US, oil-producing areas in the early 1980s. Incorrectly using these as benchmarks, the 2008 housing “slump” could appear barely newsworthy. To the contrary, the crash quickly gained steam. Economic studies have shown that even fairly small declines between 10% and 15% are enough to eliminate the homeowner’s equity. We saw this occur in early 2007 within communities in Florida, Nevada, and Louisiana.

    Death by Derivatives

    Staggeringly, nearly half the loans issued between 2005 and 2007 were subprime. Of course, this means homebuyers are much more likely to default. Far worse for the national economy, banks used these loans to finance trillions of dollars of derivatives. Banks infamously packaged these loans into mortgage-backed securities. They peddled them as “safe” investments to pension funds, corporations, and retirees. Moreover, they were thought of as “insured” from default by a new insurance product called a credit default swap. The biggest issuer was American International Group, Inc. (AIG).

    Once borrowers defaulted, the mortgage-backed securities had very questionable value. A huge number of investors began to exercise their credit default swaps, such that AIG ran out of cash. They were ready to default themselves, until the Federal Reserve bailed them out.

    Investment banks with a large number of mortgage-backed securities on their books – most notably Bear Stearns and Lehman Brothers – were rejected by other banks. Without cash to continue operations, they ran to the Fed for help. The Fed wound up finding a buyer for Bear Sterns, but not the latter, Lehman. The bankruptcy of Lehman Brothers kicked off the 2008 financial crisis, officially.

    Are We on The Brink?

    Studies show investors are seriously questioning whether another real estate market crash will happen in the next two years. Housing prices are more or less stagnant, while the Fed is beginning to drop interest rates. This is indicative of a bubble and historically we know that bubbles burst.

    However, there are many structural differences to consider when evaluating today’s market with the housing market in 2005. Firstly, the volume of subprime loans makes up a smaller percentage of the mortgage market. Interestingly, however, these are growing under the “nonprime loans” name. In 2005, they contributed roughly 20% (Amadeo, The Balance). Additionally, banks have greatly increased lending standards. Investors, those who flip houses, have to provide between 20% to 45% of the cost of a home. Compared to during the subprime crisis, buyers needed to provide 20% or less.

    Most importantly, homeowners are not taking as much equity out of their homes. Home equity skyrocketed at $85 billion in 2006. Subsequently, it collapsed to less than $10 billion in 2010 and remained around that level until 2015. By 2017, it had only risen to $14 billion (Amadeo, The Balance). A major reason behind that is fewer people are filing for bankruptcy (Allen, Consumer Reports). In 2016, only 770,846 filed for bankruptcy; by comparison in 2010, only 1.5 million people did (Allen, Consumer Reports). Many economists, quite surprisingly, attribute this to “Obamacare”.

    The Bottom Line

    Concisely, we’re very unlikely to see anything close to what we witnessed in 2008 for a number of reasons. Primarily, structural changes in the economy – such as volatility ratio mandates for investment and retail banks – would prevent a widespread financial epidemic, even if the housing market were to suffer a significant downturn. Equally important to the housing market, mandates for homeowners and active real estate investors are more stringent. Finally, cost-cutting measures, such as the ACA, make it less likely for homeowners to default on mortgage payments.

    This is not even considering that while some reputable economists believe we may see prices decline in the next two years, we’ve yet to see it. In fact, as we continue to recover from COVID-19 economically, we’re seeing a housing market recovery. There’re multiple reasons we don’t need to worry about a repeat of 2008.

  • How Real Estate Impacts the US Economy

    Real estate, commonly known as the largest asset class in the world, would intuitively play an integral role in the US economy. Residential real estate properties provide a vital pillar of the “American Dream”: private housing for families. Separately, they can also be the greatest source of wealth and savings for many Americans. Commercial real estate (CRE) – including apartment buildings – creates jobs and rented spaces for retail stores, offices, and manufacturing warehouses. Real estate business and investment provides a source of revenue for millions of Americans.

    In 2018, real estate construction contributed $1.15 trillion to the US national economy output (BEA.gov). That accounts for 6.2% of the US economy GDP over the same year, which is quite a significant proportion. For comparison’s sake, it’s more than the $1.13 trillion in 2017, however less than the 2006-peak of $1.19 trillion. Back in 2006, real estate construction was an even heftier 8.9% component of US GDP (Amadeo, The Balance).

    While there’s some politicization over whether these qualify as “good” jobs, real estate construction is obviously labor-intensive. It plays a major force in job creation. The decline in housing construction was undoubtedly a major contribution to the COVID-19 Recession’s high unemployment rate.

    The Ripple Effect in the US Economy of Real Estate

    Construction is the only part of real estate that’s directly calculated into US GDP (Amadeo, The Balance). Nonetheless, real estate affects many other areas of the US economy, which aren’t captured by US GDP metrics. As an example, a decline in real estate sales inevitably leads to a decline in real estate prices. This effect lowers the value of all homes, irrespective of whether owners are actively selling or not. Furthermore, this causes a reduction in the overall number of home equity loans available to owners. Ultimately, the market impact is reduced consumer spending, as more homeowner cash is tied up in housing projects.

    As many are aware, nearly 70% of the US economy is based on personal consumption (BEA.gov). Consequently, a reduction in consumer spending is directly linked to a downward spiral in the US economy. The downward spiral causality is easily witnessed. This macroeconomic phenomenon leads to further drops in employment, income, and consumer spending (Amadeo, The Balance). The primary concern about the US economy falling into a deep recession stems from concerns about Federal Reserve policy. The Federal Reserve received widespread accreditation for keeping rates very low throughout the COVID-19 pandemic. Many experts argue a further cut to interest rates are still necessary (Amadeo, The Balance). There is one positive takeaway regarding lower home prices. They lessen the chance of inflation.

    Real Estate and the 2008 US (Global) Economy Recession

    Of course, no better example exists of real estate’s impact on the US economy than the 2008 recession. While very few immediately realized it, falling home prices triggered the downturn and subsequent broad, ill effects. According to the National Association of Realtors (NAR), by July 2007, the median price of an existing single-family home in the US was down 4% since its peak in October 2005 (National Association of Realtors). Macroeconomists, risk analysts, credit analysts, and economists as a whole couldn’t reconcile how concerning this was. Clear definitions and numeric parameters of recession, bear market, and a stock market correction are well standardized. The same is still, not yet true for the housing market.

    For perspective and comparison, many likened it to the 24% decline during the Great Depression of 1929. Others compared it to the decline ranging from 22% to 40% in US, oil-producing areas in the early 1980s. Incorrectly using these as benchmarks, the 2008 housing “slump” could appear barely newsworthy. To the contrary, the crash quickly gained steam. Economic studies have shown that even fairly small declines between 10% and 15% are enough to eliminate the homeowner’s equity. We saw this occur in early 2007 within communities in Florida, Nevada, and Louisiana.

    Death by Derivatives

    Staggeringly, nearly half the loans issued between 2005 and 2007 were subprime. Of course, this means homebuyers are much more likely to default. Far worse for the national economy, banks used these loans to finance trillions of dollars of derivatives. Banks infamously packaged these loans into mortgage-backed securities. They peddled them as “safe” investments to pension funds, corporations, and retirees. Moreover, they were thought of as “insured” from default by a new insurance product called a credit default swap. The biggest issuer was American International Group, Inc. (AIG).

    Once borrowers defaulted, the mortgage-backed securities had very questionable value. A huge number of investors began to exercise their credit default swaps, such that AIG ran out of cash. They were ready to default themselves, until the Federal Reserve bailed them out.

    Investment banks with a large number of mortgage-backed securities on their books – most notably Bear Stearns and Lehman Brothers – were rejected by other banks. Without cash to continue operations, they ran to the Fed for help. The Fed wound up finding a buyer for Bear Sterns, but not the latter, Lehman. The bankruptcy of Lehman Brothers kicked off the 2008 financial crisis, officially.

    Are We on The Brink?

    Studies show investors are seriously questioning whether another real estate market crash will happen in the next two years. Housing prices are more or less stagnant, while the Fed is beginning to drop interest rates. This is indicative of a bubble and historically we know that bubbles burst.

    However, there are many structural differences to consider when evaluating today’s market with the housing market in 2005. Firstly, the volume of subprime loans makes up a smaller percentage of the mortgage market. Interestingly, however, these are growing under the “nonprime loans” name. In 2005, they contributed roughly 20% (Amadeo, The Balance). Additionally, banks have greatly increased lending standards. Investors, those who flip houses, have to provide between 20% to 45% of the cost of a home. Compared to during the subprime crisis, buyers needed to provide 20% or less.

    Most importantly, homeowners are not taking as much equity out of their homes. Home equity skyrocketed at $85 billion in 2006. Subsequently, it collapsed to less than $10 billion in 2010 and remained around that level until 2015. By 2017, it had only risen to $14 billion (Amadeo, The Balance). A major reason behind that is fewer people are filing for bankruptcy (Allen, Consumer Reports). In 2016, only 770,846 filed for bankruptcy; by comparison in 2010, only 1.5 million people did (Allen, Consumer Reports). Many economists, quite surprisingly, attribute this to “Obamacare”.

    The Bottom Line

    Concisely, we’re very unlikely to see anything close to what we witnessed in 2008 for a number of reasons. Primarily, structural changes in the economy – such as volatility ratio mandates for investment and retail banks – would prevent a widespread financial epidemic, even if the housing market were to suffer a significant downturn. Equally important to the housing market, mandates for homeowners and active real estate investors are more stringent. Finally, cost-cutting measures, such as the ACA, make it less likely for homeowners to default on mortgage payments.

    This is not even considering that while some reputable economists believe we may see prices decline in the next two years, we’ve yet to see it. In fact, as we continue to recover from COVID-19 economically, we’re seeing a housing market recovery. There’re multiple reasons we don’t need to worry about a repeat of 2008.