Can History Suggest Future?


By Ian Slater | April 22nd, 2020
I did a historic study yesterday and wanted to share with my readers!
While we (anyone) have no idea genuinely how coronavirus will affect the market because it largely hinges on the overall effect the economy has on NYC, and how much harder hit we will be than other parts of the country, but if you look back at history, it can be helpful. What we do know:
  • This is caused by an exogenous event-- so many think it is more similar to 9/11 than 2008 (but unfortunately, data-tracking wasn't strong back then so only evidence of market shifts is really anecdotal)
  • This is not a financial crisis (yet)-- but has the ability to turn into one
  • Real estate was falling since 2015 but it began 2020 with its strongest quarter since the 2015 peak, with prices, contracts signed, and closings all climbing the most they had in years (so we entered into this with strong fundamentals).
  • There is clear pressure on prices from many angles-- unemployment, potential fear of cities, incomes falling, stock market volatility, businesses s
  • huttering-- so we have to expect an effect, we just don't know how quickly it will change.
  • Data from other countries, specifically Asia, are showing that for home sales, the bounceback was/is remarkably fast but this has largely been a result of aggressive and organized testing and tracing, both things the US is not doing so well at right now.

Because there have been many conversations about the market potentially dropping 25-30%, I looked back at the 2008 crisis, which was a uniquely real estate and financial crisis, to see how prices and closing counts changed. Here's what I found:
  • Number of closings fell off the table in 2008-2009. Their lowest was 518 in Feb of 2009 (five months after initial "shock").
  • The interesting thing here is that the average price didn't drop nearly as much as the number of closings did. It became just a lightly transacted market:

  • If you take the third quarter of 2008 to the third quarter of 2009 (When prices were lowest), the change in price was 5.5% down.
  • The "peak to trough" drop-- taking the highest monthly average price to the lowest-- was about 22%. But keep in mind, our current "peak" was in summer 2015 and we were already seeing prices averaging 10-13% lower than that.

This is all to say that if this looks anything like 2008, we won't see prices fall as much as we may feel it will happen right now, but if they do, it will take time. And, there were a lot of people who purchased in 2006 and 2007 who still made a ton of money on their real estate over time, as long as they didn't sell in the dip.
Also, expect there to be a short-term gap in amount of buyers in the market, but for that number to come back with a vengeance pretty quickly. It took about nine months in 2008-2009 to see the number of closings come back to pre-recession levels, and then for the subsequent years, you saw a run up in prices to historic highs in 2014/2015. I think this is something like a "safety net" effect--although the market is weak and there are is going to be downward pressure on pricing, there will be so much domestic and international attention on the notion of a "great deal" existing that there will be more competition than expected and it will cause a safety net to exist.
We will of course continue to monitor the situation, but history is often a telling sign of future.

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