why does the real estate market crash with the economy, if landlords and mortgage companies dont usually kick out people as soon as they are not able to pay their rent/mortgage because of the market crash?
In: Economics
In 2008 real estate was the source of the problem which explains that time. Other market or economy issues affect real estate because people either dont have the money or are uncertain of the future and dont want to buy.
Real estate is often bought as an investment. Without money to invest this buying doesn’t occur. Without these sales the prices drop.
Actually, slowdown in real estate has always preceded a recession since WWII. Most significant indicator is a sharp slowdown in new home starts which happen before the onset of a recession. Reasons for this slowdown are numerous. Not enough buyers at the price. Inability for builders to lower the price because of high input costs. Slowdown in wages or some other calamity that prevents buyers from buying.
(I don’t think that it can be explained to a 5yo) It’s kind of a domino effect.
The majority of houses are financed instead of entirely bought. (Sorry if it doesn’t make any sense, English is not my primary language).
Because of that, when people looses their job they can’t afford pay mortage that they took to buy the house.
On the other side of the problem stands the bank. It doesn’t have (and own) all the money that it lands. The truth is that when I deposit, let’s say, 100 bucks in a certain bank the bank uses it to loan to someone else (I know, it uses to invest in options and stuff but I’m trying to make a point) and to make things worse it doesn’t loan the money to a single person but to a bunch of people. That is possible due to “credit”.
When you are out of money you can’t pay the mortgage for your house and, in the worst case scenario, can’t even get back your money as the bank loaned that amount to people whom can’t pay the bank because they lost their job as well.
People do invest in real state and, when no one has money to buy, it doesn’t matter if you house worths 2 millions USD as no one have that amount to buy or don’t want to take a loan from the bank because, when no one is paying the loans the banks elevate their taxes trying to shield themselves from people taking mortgages and not paying them back.
No one wants to sell their property for less than it’s worth. If your home is worth 2mi USD, you won’t take 500k to sell it. But the price is going to drop, even thought you don’t want it to.
Right now you have a bunch of people selling their property to get money to pay their bills but you don’t have people buying as no one have any money and people start to lower the price for their properties as they gotta live somehow.
So, low prices, no buyers, constructors stop building homes because it’s not worth it as no one is buying and the prices are low and then companies start to fire people as they’re not making any money and the cycle repeats itself.
The problem is that people who were thinking of upgrading their home and were looking for new homes are no longer looking for new homes. This is both to reduce the spread of the pandemic but also because they are more likely to save money rather then spend it on a new home, have gotten their mortgage pre-approval rejected or revoked or just because they have other things to worry about at the moment then looking at new homes. And then there is the people who were looking at buying a house to rent out for extra income who are now reconsidering as nobody have money to rent a new apartment any longer. So the real estate market is going down with the rest of the economy. It is likely not going to be as bad for the US real estate market as in 2008 or for the UK real estate market as in 1989 as these financial crashes were created due to a real estate bubble. But the real estate market will follow a lot of the rest of the market.
Real estate prices act as a function of the economic health as a show of supply and demand.
If everyone has a job, there is money to pay rent and landlords raise their rents until the market caps out at saturation pricing. When rent is high, developers build more units to take advantage of the high rent scenario. More units can bring in more rent. As long as they are full. Supply is low, demand is high, prices go up.
If people start losing their jobs, demand slows. Upward mobility slows. People downsize to reduce expenses. Supply is now high, demand goes down, prices go down too. Empty or a glut of empty units drives down the price. As a landlord you can’t negotiate or leverage a high price when there is a dozen empty units in the building.
Empty units and poorly performing investment properties lower property values because they become cash flow negative until the value equals the new lower income potential.
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