Not for everyone, but the largest investment for many investors isn’t in individual stocks, the S&P 500 or bonds. It’s in their house. When it comes to measuring the risk/reward of their assets, the housing market has a pretty large weighting on their overall portfolio. As such, many investors fear a recession, particularly if it leads to a housing market crash.
Fears of a recession are alive and well. However, so far we’re not seeing those fears manifest into anything tangible. That’s as the economy continues to chug along and as the labor market remains robust. Just a few days ago, the monthly jobs report for April was strong (although February and March were revised lower).
For many homebuyers, as go mortgage rates and jobs, so goes the housing market. If rates remain low (or at least modest) and the jobs market remains strong, then people may look to buy. However, rising rates don’t help, nor does a shaky employment situation.
Greg McBride, Chief Financial Analyst at Bankrate, notes:
“Home prices are high, mortgage rates are high and inventory is still quite low […] If the economy and the job market hang in there, we’ll see some pickup in housing activity but no material changes to the price, rate and supply fundamentals.”
However, there are conflicting views. For instance, Pantheon Macroeconomics founder and Chief Economist Ian Shepherdson says a decline in mortgage rates will not stimulate enough demand to meet rising supply. Shepherson has previously called for a 15% correction in housing prices.
Sizing Up a Housing Market Crash
The housing market is a double-edged sword. On the one hand, a house is a large but illiquid asset. For most investors, they’re lucky that is the case, otherwise people would be buying and selling constantly. With selling a home being a difficult and somewhat expensive, cumbersome process, it keeps homeowners in place for longer chunks of time. That increases their odds of making money on their investment.
On the other hand, most homebuyers leverage debt to make their investment — i.e., a mortgage. That’s a great strategy, assuming investors can continue to make their monthly payments.
Given the size of these assets, debts and investments, it’s no wonder that some investors worry about a housing market crash. It doesn’t help that the previous recession was fueled by the housing industry and bad mortgages, which led to a collapse in home prices.
The housing market crash of 2008 took years to recover from — financially and mentally. Not only did people lose on property values, but many lost their jobs, too.
While the stock market continues to hold up relatively well, JPMorgan (NYSE:JPM) CEO Jamie Dimon’s comments about “storm clouds” being on the horizon comes to mind. Bank failures, rising interest rates and stubbornly high inflation are all reasons to worry. Tightening in the credit market doesn’t typically lead to economic expansion.
That all said, we’re not teetering on the same shaky foundation as we were 15 years ago. Of course, that doesn’t mean we can’t or won’t have a recession. But the same pieces are not in place for such a catastrophic outcome.
On the date of publication, Bret Kenwell did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
