Recent data regarding the state of the housing market is negative, with sales of existing homes falling to levels not seen since the aftermath of the Great Recession. According to the National Association of Realtors, January existing-home sales across the country were down for the twelfth consecutive month to an annual rate of four million, though some regions (including the south) saw modest improvement. Nationally, sales were 36.9% lower than a year prior.
Having said that, the current cycle is nothing like the situation that emerged during the Great Recession – which is a very good thing! Although drilling down into all of the complications of the 2007 to 2009 economic and financial crisis is a task requiring more verbosity than a column permits, a quick rundown for context is worthwhile.
The economy had been growing for a number of years thanks in part to low interest rates (by the standards of the time) as the Federal Reserve took action after the dot-com downturn of the early 2000s. Home prices rose while underwriting standards decreased dramatically in an attempt to enable more people to qualify. A vibrant market for securities backed by subprime mortgages developed, even though many of the underlying loans were sketchy at best. The SEC encouraged risk-taking by large firms by lowering capital requirements. Even derivatives (side bets) on mortgage debt were all the rage. It was a house of cards – and somebody sneezed! Interest rates began to rise, and the housing market was saturated. The subprime mortgage market collapsed, and some of the most prominent financial institutions in the world were eliminated. It took several years for total US employment to recover, and the housing market and construction were slow to recover.
