If you read the news yesterday, then you probably noticed the Dow Jones dropped more than 800 points.” Both the Dow and S&P 500 posted their biggest one-day drops since early February, while the Nasdaq notched its largest single day sell-off since June 24, 2016 (CNBC).”
Leading up to the Great Recession, one of the first signs of recession was a housing bubble. A lot of people were receiving housing that they could not afford, with money that was lent out recklessly. As such, the housing market can be a good indicator of national performance and many economists now track housing information to make predictions about general economic health.
Current Economic Indicators – Real Estate:
After the real estate debacle of the Great Recession, home prices are now near record highs in many markets with mortgage default and foreclosure rates at near record lows, according to the National Association of Realtors, or NAR.1
However, Lawrence Yun, NAR’s chief economist, says some of America’s most overheated real estate markets will begin to see a slowdown by year-end, albeit mainly due to diminished supply rather than weaker demand. Fortunately, some of the policy reforms and consumer protections put in place during the last decade have led to more prudent lending standards. Today’s average homebuyer has a higher credit score than those who were granted mortgage loans prior to the real estate market decline.2 This reduces the likelihood of a recession caused by a housing bubble.
The Future is Uncertain:
After years of predicting a bubble in housing prices, price-growth may not be declining — but it does appear to be decelerating. The national index of annual gain recently dropped from 6.4 percent to 6.2 percent. However, the growth rate is still more than twice the rate of inflation.3
What goes up must come down — although in finance, one never knows by how much. We don’t know when, but the cyclical nature of economies show us that prices will fluctuate at some point in the future.
The multifamily residential market continues to flourish despite increasing vacancy rates, which have been incremental and moderate. Rent growth is currently at 4.5 percent annually while vacancies are just under 5 percent nationally. Affordability is one of the biggest issues for both the multifamily and single-family housing markets, but that’s not exactly bad news for landlords.4
While only in the proposal stage, President Trump has pitched an additional tax break linking capital gains to inflation. This would adjust the original purchase price for inflation, which in turn would likely drop the tax rate by several percentage points for both real estate and stocks. While not assured, a drop in taxation would likely increase investment in real estate and the stock market. A tax cut could help the national economy in the short term, but analysts project that more than 63% of the tax break would benefit the top 0.1% percent of taxpayers and cost more than $102 billion in tax revenues over the next decade.5
Worth watching is Uber’s recently announced launch of Uber Real Estate services, designed to upend traditional real estate brokerage services by reducing transaction costs by up to 50 percent. The firm says it will hire only highly experienced brokers and broker attorneys and offer them equity participation based on the company’s performance metrics.6
What to Do
The recent drop in the stock market doesn’t appear to be lingering into today’s day trading. We don’t know what will happen in the long term yet, because competing influences make that outcome subjective. If housing prices start declining, it’s generally a good idea to sell at the top of the market, particularly for anyone thinking of downsizing ahead of retirement. However, we don’t recommend taking this decision lightly. Be sure to consult with a professional real estate agent or broker to help decide what’s best for your unique situation.
I am a Retirement Income Certified Professional with wisdom from working with hundreds of previous retirees. If you’re thinking about cashing out your retirement assets, then I can provide you with professional insight based on what worked for other retirees. Have a retirement investment question, or other economic concern? Call us to schedule an appointment: (512) 638-9499.
1 National Association of Realtors. Aug. 27, 2018. “Realtors Chief Economist Reflects on Past Recession, What’s Ahead for Housing.” https://www.nar.realtor/newsroom/realtors-chief-economist-reflects-on-past-recession-whats-ahead-for-housing. Accessed Sept. 4, 2018.
3 Andrea Riquier. Realtor.com. Aug. 28, 2018. “Home-Price Growth Slows Again, Case-Shiller Says.” https://www.realtor.com/news/real-estate-news/home-price-growth-slows-case-shiller-says/. Accessed Sept. 4, 2018.
4 Jeremiah Jensen. HousingWire.com. Aug. 13, 2018. “Same rent, different day: Multifamily mighty at midway point in 2018.” https://www.housingwire.com/articles/46430-same-rent-different-day-multifamily-mighty-at-midway-point-in-2018. Accessed Sept. 4, 2018.
5 Kathryn Brenzel. Therealdeal.com. Sept. 4, 2018. “Trump is considering a tax break that would be a boon for real estate.” https://therealdeal.com/2018/09/04/trump-is-considering-a-tax-break-that-would-be-a-boon-for-real-estate/. Accessed Sept. 4, 2018.
6 PR Newswire. Sept. 4, 2018. “Uber Real Estate is Now Disrupting Real Estate With Their Uber Model.” https://www.prnewswire.com/news-releases/uber-real-estate-is-now-disrupting-real-estate-with-their-uber-model-300704933.html. Accessed Sept. 4, 2018.