Recessions, Recoveries, and COVID-19
Most experts agree that we are now in a recession. Whether or not that is the case, it’s important to remember one very important thing: a recession does not mean a housing crisis or “crash” like we saw in 2008; a recession doesn’t necessarily even mean that home prices will depreciate. As you can see in the below graph, home values declined in only two out of the five most recent recessions. This means that in three out of the five most recent recessions, home values actually increased.
The pain of The Great Recession (2008-2009) is still very fresh in the minds of many New Yorkers and looking at this graph, it’s easy to see why. However, The Great Recession was the result of a crash in the mortgage and housing markets; whereas today, the stock market correction is being caused by an outside event (the coronavirus) & not connected to the housing industry.
Today is more reminiscent of the challenges immediately following 9/11. The shock of an external event has generated fear, angst and anxiety among the general public with the same parts of the economy under pressure now as then - airlines, leisure, hospitality, restaurants, entertainment and consumer discretionary services in general. However, in spite of these headwinds, in 2001, 2002 and 2003, home prices in Manhattan actually appreciated by 9.5%, 2.1% and 6.1% respectively.* (Miller Samuel)
This crisis is being measured in days, but real estate is a much slower process. The pricing impact of the pandemic will not be known for at least 6 months. That is the time it will take for any deals being negotiated now to come to terms, sign contracts, receive board approval, close and then be recorded in the public records.
Ultimately, it is still too early to say exactly how the pandemic will affect the New York housing market. The most optimistic scenario sees life return to some form of normal by May/June - unemployment is higher but not catastrophic and the economy rebounds relatively quickly. In the short-term we may even see a “seller’s market” as pent-up buyer demand is unleashed on a market that has significantly lower listing inventory. However, listing inventory should increase in the fall as sellers make their move, resulting in more options for buyers and greater negotiability. Home prices may settle 10-15% lower than pre-crisis levels, with less negotiability on the lower end of the market and greater discounts for higher price points.
On the other hand, a prolonged shutdown will cause deeper damage to the overall economy, and in turn to the housing market. Everything depends on how long the pandemic lasts. With that in mind, the below graph offers some comfort as to the resiliency of the U. S. economy.
Historically, every S&P 500 downturn of about 15% or more since the 1930s has been followed by a recovery, and a sturdy recovery at that. Returns in the first year after the five biggest market declines since 1929 have ranged from 36.16% to 137.60%, and averaged 70.95%. Over a longer term, the average value of an investment in the stock market more than doubled over the five years after each market low. The focus here not being on the value of an investment doubling during the recovery period but more so on the market's resilience.
Being mindful that stock market recoveries aren’t guaranteed, taking your money out of the market during declines assures that you’ll miss the full benefit of the recoveries if you don’t get back in at the right time. The analysis presented below shows the value of a hypothetical $1,000 investment in the S&P 500 during the last decade of the recovery that followed the Great Recession. Specifically it depicts how your investment would have fared had you taken your money out of the market and missed a number of its best days. This reaffirms that if you are in fundamentally strong investments, it’s really about “Time in the Market” vs. “Timing the Market.”
This isn’t to suggest an apples-to-apples (NYC Big Apple pun intended) comparison is possible between the U.S. stock market and the NYC real estate market. However, it is fair to posit that real estate investments have just as much recovery/return potential as stock investments, if not more. The potential long term results based on historic data are quite compelling. A lot of the success of these real estate investments will be based on educated purchases from buyers who take the time to determine what their ownership time horizon is, potential tax benefits, property uniqueness/scarcity, and rental income down the road.
With the real estate market on pause along with the rest of the world, the best thing we can do is educate ourselves and be prepared for the possible outcomes. Yes, the nature of this pandemic and economic shutdown are unprecedented; we are in uncharted territory. Yet as we’ve seen, the U.S. economy and the New York City real estate market have faced unprecedented, seemingly insurmountable challenges in the past, and each time we’ve come back stronger and wiser than we were before.