about 1 year ago • 1 min
With a recession potentially on the way and US home prices softening across the country, economists are keeping an eye on this important sector. It’s easy to see why: housing was the epicenter of the Great Recession of 2008-09.
The total value of US houses (black line) has more than doubled over the past 10 years, and at that pace, it might seem like some sort of sharp decline is inevitable. But there’s one crucial difference this time around: the latest housing boom, while helped by ultra-low mortgage rates, hasn’t been entirely debt-fuelled – at least, not like the last one.
The total level of mortgage debt (blue line) is only a tick higher than it was back in the mid-2000s. And that means that the amount of home equity (orange line – this is the value of a home, minus the amount owed on it) is also more than double what it was at the 2007 housing market peak. In other words, home prices would need to fall a lot before today’s homeowners find themselves underwater. And that means it’s a lot less likely that an economic downturn would result in a wave of confidence-shattering foreclosures and housing fire sales.
So, while home prices may lose their footing in a coming recession, they’re unlikely to crumble to the kinds of depths they saw in 2008-09, when the market was built on far shakier foundations. And that should mean the impact on consumer confidence – and spending – is much more muted.
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