I got into a fun debate with one of our clients/friends yesterday via text about Covid-19’s impact on our economy. Their position was that this is worse than in 2008, and my opinion is that it is not even close. I thought I would take some time explaining how COVID-19’s affect on our market is different. Not good – but not as bad as 2008.
For context, I was a Realtor in 2008 and, of course, still work in real estate today. In August of 2008, the world watched as Lehman Brothers, the fourth-largest investment bank in the world, collapsed. This was a $4,000,000,000,000 company. Followed immediately after the collapse of Lehman Brothers was the complete freeze of credit across the banking industry. Why is that a big deal? Companies had their loans called. A Freeze in lending caused payroll issues, supply issues, and default of major companies across all industries. People had their credit cards turned off, equity lines severed, and loans called. Not to mention anything about the adjustable-rate loans that readjusted ended up with ridiculous terms. We lost 700,000 jobs per month after August 2008.
For housing, things were MUCH worse than they are today. You see, real estate lending was the reason the markets collapsed. More specifically, mortgage-backed securities or CDO’s. A conspiracy of greed had the FCC rating subprime lending practices as AAA investments. These Ninja loans, undocumented income, etc. spread like cancer in our real estate industry for years before the collapse. In essence, no one could afford their homes, and more importantly, they had no skin in the game. I saw loans in 2007 that were 110% to value. Meaning, the buyer put zero down and received 10% over asking price back from the lender. They called it a furniture allowance. It’s crazy to think about that today, but I lived through it. The impact of these practices was the moment things looked bad economically; those people with these loans walked away from their homes because it made financial sense for them to do just that.
Housing, particularly in Seattle, is very different today. Not only has Seattle’s median income been on a steep incline over the last ten years, the percentage of a downpayment, spurred by the competitive real estate environment, is VERY high. Over 20% typically, and much higher, often up to full cash purchases. Plus, Seattle’s market has appreciated 60% since 2012. People own their homes now with a significant margin. U.S. homeowners are sitting on a record 5.8 Trillion dollars of home equity vs. 2009 when 25% of all households were in negative equity scenarios. You can see where I’m going with this and the reality is things are very different today. Even those who just purchased likely had a 20% plus downpayment. So, no one is going to walk away from that type of equity. The impact on real estate prices cannot be underestimated. In 2008, foreclosed homes ruled the market and sold for a 30%+ discount. Desperation caused prices to plummet.
So far, we do not see these issues at all. In August 2008, I recalled the market shutting down. Nobody bought a home. I was on calls with other agents, astounded by the complete collapse of any activity at all. Of course, there could be no activity when there were no loans to purchase homes. NO LOANS got approved during this time. Then the housing market collapsed so completely that most Americans experienced 30% declines in value.
Now, I’m not saying the COVID-19 pandemic is not going to get worse before it gets better. I’m merely saying that we should keep things in perspective. Credit markets are flowing, job losses among homeowners are likely to be minimal in contrast, plus people can sell their homes with equity and still be okay. For those who cannot, they will choose not to sell, an option not available to most in 2008. These differences offer some protection on home value loss. Plus, once this virus concludes, the snapback in the market could be as vigorous as the decline.
The key to look out for is the free flow of credit. If this changes then be prepared for something much worse. I will say, those in charge of preventing 2008 like catastrophe have learned a bit and seem to be dealing with this danger much more effectively than they did back then. For example, they are focusing on helping people over large corporations and not allowing stock buybacks with bailout money. This action alone could keep people employed over benefiting stock prices. Of course, Democrats still have to win this argument as Mitch McConnell, and the GOP want few rules to the bailout and more freedom for large corporations. Regardless of who wins, the stimulus is massive and has significant individual help to citizens. Something the 2008 stimulus completely lacked.
We still have many unknown factors. How long will this go on? Will the service industry get sufficient help that they will reopen when this has passed? Will there be a market snapback thanks to cooped up people bored at home? How will bailed out companies use the stimulus? Will the FED be able to keep credit flowing? This all needs to be watched.
Of course, this is an ever-evolving situation. I will have my eye on this with updates for you all as we move through these uncharted waters together. 🙂