US Recession Watch, July 2020 – Shapes of the Recovery: J-Curve
The US Recession Watch, July 2020 – Shapes of the Recovery: J-Curve
The first three quarters of 2020 were a recovery period. The housing market and stocks prices fell sharply, but they were largely self-correcting in the long run. As a result, there is no sign of recovery in the foreseeable future. However, the U.S. economy is not as strong as it was in the previous two recoveries, in large part due to the Federal Reserve’s stimulus package and the “too big to fail” bailout package for financial institutions. The Federal Reserve and the Treasury Department are still engaged in large-scale deficit spending plans that will affect our economy over the long haul, but these plans are not yet fully implemented.
In the meantime, the recession and its aftermath have caused real estate markets across the country to experience a significant decline. There is also an increasing trend of foreclosures, as buyers become more cautious due to the uncertain economy. As more distressed properties come onto the market, there will be an increase in property owners with delinquent mortgage payments. These properties will require substantial repairs. It is important to remember that the majority of the homes that are in foreclosure have been purchased by lenders who plan to refinance them.
In spite of the worsening economy, the real estate market continues to grow rapidly. In fact, the housing market in the United States remains one of the most resilient markets in the world, due to low interest rates and high home values. In fact, over the last year, we have seen a steady increase in real estate values, even in the face of declining home prices.
If you look at the current real estate market, you may find that the “bubble” has already burst. Prices are falling sharply, and prices for homes across the board have dropped in recent months. While we do have a number of good “undervalued” residential areas, many areas are simply priced out of the affordability range of many potential homebuyers. Even if you live in a good neighborhood, chances are that your home is not as desirable as you thought.
To get a better understanding of the dynamics of the recovery, let’s take a look at a piece of research from The National Association of Realtors (NAR): “The J-Curve of Home Sales and Prices”, released in the July 7th, 2020 edition. The J-Curve identifies the top 10 metro areas that have seen the highest number of home sales in the past four years.
The bottom line is that the top 10 areas are places where homes are selling for the most per square foot – areas where the market is already overpriced, and areas where home prices have dropped sharply. So where is the boom in the market? Most people are finding it in high-priced cities such as Houston, Miami, Orlando, and Washington DC, all areas that are either on the bubble or on the brink of being on the bubble.
The J-Curve is designed to provide an accurate picture of where the market is right now, and helps us to understand whether the market will be able to maintain its recent momentum and keep the momentum going through the next few years. While there are some areas in which the recovery looks good, such as Denver, Colorado, the outlook for a rebound is far from good.
In order for the U.S. economy to see any improvement, we need to take a close look at the dynamics of the J-Curve. The biggest issues include rising mortgage rates, and low incomes. While it may seem obvious, it is a fact that home prices have fallen to levels that make a home affordable to most buyers today – even to those who have the lowest incomes possible.
A growing concern with regard to the U.S. economy is the shape of the J-Curve. Although the current home bubble may not be as severe as it appears from the perspective of many in the media, it is possible for the market to collapse in the future. While most experts agree that the current state of the market has been good, the fact is that it is still very favorable for buying.
In order to see the shape of the housing market, it may be a good idea to take a look at NAR’s “What the Market Saw” report, which is an annual overview of the housing market. This report provides an overview of the past year and a few short term trends and tells us about what the market will be like for the coming year.