This year, the Dow Jones Industrial Average had its worst day of the year with an 800-point dive. Then, economists revealed that the bond yield curve inverted, which has been a strong indicator in the past of a future recession. Homeowners and mortgage industry professionals are beginning to ask themselves if the housing market is headed into a recession, and if so, what will be the national impact?
Unfortunately, the last economic recession made a severe impact on the housing industry and disrupted the psychological security of many homebuyers. However, economic professionals don’t believe that an upcoming recession would cause as much damage as its precursor.
First, let’s take a closer look at what caused the 2008 Financial Crisis. Hedge funds, banks and insurance companies allowed mortgage lending standards to erode to the point of financial ruin for many homeowners. Subprime mortgages were made accessible to almost anyone, including those who couldn’t afford to purchase, causing homeowners to default on their loans.
Today, the Dodd-Frank Act, a Wall Street reform and consumer protection act, places mortgage lenders under stricter regulations to minimize the effects of a recession and provides protection to borrowers when the Federal Reserve raises the federal funds rate.
Many financial professionals state that over-construction played a major factor in the last recession, but claim that it is under-construction at the root cause of the potential upcoming recession. The undersupply of homes in many housing markets is the direct effect of more individuals staying in place as demand begins to rise. This could potentially lead to a drop in the number of home sales, bidding wars, price appreciation and quick home sales.
Recessions will always come and go with the rise and fall of the economy, but it is important that borrowers are aware and prepared when one does materialize. Now, more than ever, it is important to focus on assisting homebuyers and educating them where it counts; credit education and providing them with tools to eliminate debt.