The benefit of having been in the Alberta real estate industry for more than 20 years is that I have sold houses in Recessions, Corrections, Pandemics, Sellers’ Market (inventory low) and Buyer’s Market (inventory high).
Lately there has been a great deal of chatter whether we are IN a recession or going to be heading into a recession. For the record, I am not an Economist sitting at a desk analyzing data ON the real estate market. I am a practicing real estate broker supporting my agents in their career to sell more houses AND I am also an active real estate agent serving hundreds of past clients. I am in the trenches everyday speaking with numerous buyers and sellers from all levels of society listening to their worries, fears, and trying to predict the future with real-time data that I am getting IN the real estate market.
I am not sure if a prediction from an Economist is more accurate than my prediction of what I see on a daily basis. Regardless, based on my past experience from the 2008 Alberta real estate market crash and now being fully engaged in 2022 post pandemic, I do not see many similarities from the past recession.
What is a Recession?
In the simplistic terms it is when the market economy has two consecutive quarters of negative economic growth. Back in 2006 and 2007 in the Edmonton real estate market, I was a Broker of real estate franchise office with more than twenty agents.
Sales were good, house prices were steady, inventory was low, the mortgage rates were over 6% and people were still buying. Although mortgage rates were a bit higher, a buyer could finance 100% of his purchase price with 0% down payment. To offset the cost of higher mortgage rates a buyer could amortize their purchase price for 40 years making the mortgage payment a bit lower. At the time, this was all great news, and we were selling houses and spending money like the honey was flowing. Naively, there were signs that big troubles were ahead, but I had not been in a “recession” before and had no idea how to recognize the warning signs.
Warning Signs of a Recession and Potential Trouble Coming
By the end of 2007 mortgage rates were at 6.34% and talk of Canada Mortgage and Housing (CMHC) making huge changes to the home buying qualification and implementing further buying restrictions were looming.
By the end of 2008 100% financing was all gone! Now all buyers must show a minimum of a 5% down payment to get an insured mortgage. There were no more 40-year amortizations. The maximum amount was now 35 years and that changed things drastically.
Any insured mortgage was now harder to qualify for. The credit score of 620 was the new minimum and a 45% Total Debt Service ratio was the standard. The buyers dropped off in droves. Sellers were still under the impression that they could wait and sell their home in spring. Thousands of sellers put their home on the market in spring flooding the market with inventory and majority of the buyers were gone. NO buyers-NO market. But this was only the beginning of real trouble.
The next 3 or 4 years were extremely hard for many people and small businesses. The government began dropping mortgage rates to stimulate housing sales. The mortgage renewals began coming up for many sellers from the previous buying years. But following all the economic changes thousands of homeowners could not qualify to keep their home. Their debt ratio was exceedingly high, their credit cards were maxed out and doing everything to hold on. Sadly, this created a perfect storm and forced wonderful sellers to give their dream home back to the bank. This was my introduction to a recession, but I was naively hopeful that this would only last a year.
When the markers of recession or economic change are on the horizon you need to make changes early and swiftly. Day after day I met with sellers that desperately needed to sell their home so the bank would not foreclose. The problem was that the housing prices dropped dramatically, and their mortgage was higher than what it was worth. They owned their home for only 1-3 years and there was no equity built up to rely on. Their debt was well outside the 45% of Debt Servicing and they could not afford to ride the wave out of recession.
These few years were devastating. After most of my listing appointments I would leave their house, drive away crying in hopelessness not being able to help them. But this fueled my passion for change. It was at this point that I created a For Sale by Owner program to help all the struggling sellers sell their home without paying high commission.
I presented my idea to the Western Franchise Owners to get their permission to proceed—they aggressively denied my participation in any concept of a private seller program. I sold my real estate brokerage franchise in December of 2008 and have never looked back.
When change is upon you, you must change to adapt. My error is that I did not adapt to the changing economic times quick enough and endured a longer battle than was necessary.
Now you know the back story, it was not to depress you. In fact, it is to impress upon you that all the warning signs were right in front of me, but I was not experienced enough to see them. We need to be a student of history and learn from our yesterdays. Our past is the rearview mirror, our future is our windshield. It is hard to know where you are going if you do not know where you have been.
Here are a few extremely easy warning signs to recognize that economic financial changes are coming so you can adapt quicker than I did….
- Pay close attention to what upcoming changes Canada Mortgage and Housing (CMHC) may make. If they are thinking about proposed changes…listen! They are NOT talking out of their hat.
- Watch the large fluctuation of mortgage rates. What goes up will come down. You must be financially prepared to ride the economic wave.
- Stay current on the real estate sales in your market. Watch to see the amount of For Sale Yard signs. How fast do they last on the market? How high are they selling—over list price? If they are selling steady that is a good sign. If they are selling amazingly fast and over list price that could be a sign that we are heading into a sellers’ market and housing prices will increase based on supply. Not necessarily a recession.
- Pay close attention to how many For Sale by Owner signs you see as opposed to real estate brokerage For Sale yard signs. This could be an indication that mortgage renewals are coming up and the current sellers cannot afford to pay a real estate commission. Or it could mean that the real estate service industry is getting lazy, sellers no longer see a realtor’s value and sellers think they can do it on their own. You can read more about becoming a Private Seller in my other Blog article, I’m Thinking About Selling Privately-Everything You Need to Know.
- Have an awareness of how many real estate flyers you are getting in your mailbox or on your doorstep. If agents are not able to sell houses they will not be able to afford flyers or paper marketing. Watch for flyer fluctuation.
After surviving the recession in 2008 I have come to understand that a recession is alive and like the breath in your lungs. It expands and contracts. It goes up and down. It rises and falls. It is constantly moving and fluctuating. A recession is nothing to fear but understand, and always be prepared for it. In every economy it is inevitable. So, knowing that…. recognize the signals, have awareness of your personal situation, and get prepared for whenever it does arrive.
Here is the good news! In comparison to my experience and analyzing history from 2007 and 2008, I do not feel we are currently heading into a recession. I do feel however we are in a Market Correction.
What is a Market Correction?
Three reasons why we are in a Market Correction:
- Covid Pandemic
- Mortgage Rates
- War in Ukraine
How about that Pandemic! Wow what an experience that was hey?
For two long years the world was in lock-down. Government money funded thousands of people who could not work. Many people used that money to upgrade their homes. They did not go out and socialize so their spending was dramatically decreased, and mortgage loans were paid down.
The covid shut down allowed first time home buyers to save more than the 5% down payment. As soon as the restrictions were lifted buyers hit the market hard and we were busy!
The sellers wanted to move out of the city or into bigger homes, acreages, and lake fronts. The new buyers wanted to get into a home of their own and stop renting. At the end of 2021 and the beginning of 2022, we had more buyers than we had sellers so that put our market into a SELLER’S MARKET.
The housing prices increased, and the listing supply was extremely limited. Most of the time, we were in multiple offer situations which means that buyers were paying over-list price.
Seller’s homes were selling sometimes $20,000 higher than market value. This became a potential warning signal if this kept trending upward, so the Government raised mortgage rates slightly.
Nearing the late summer of 2022, the market corrected slightly. It slowly began cooling off back to normal with the proposed increase in mortgage rates. The listing supply was now increasing steadily, and buyers had more options to choose from. The multiple offers and selling over list price were decreasing which allowed housing prices to begin to decrease. The decrease in housing prices is good thing. It is naturally coming down as a normal correction method. It is necessary correction so more buyers can enter the market and get into a home of their own.
As history shows, here is the mortgage rate summary of slight fluctuation and houses continued to sell:
- 2015 3.85%
- 2016 3.65%
- 2017 3.99%
- 2018 4.54%
- 2019 3.94%
- 2020 3.10%
- 2021 2.96%
- 2022 guesstimate rate will be around 3.95%
The mortgage rates are abnormally low due to post pandemic attempt to stimulate the markets. The price of goods and services are much higher due to the supply chain from the war in Ukraine. As you can see by the history it is pretty normal and within buyers’ comfortability to have mortgage rates between 3.5%-3.9%.
I am preparing and highly suspect that the mortgage rates will rise between 3.8% – 4.38% by the end of 2022 and the supply chain will break loose lowering the cost of gas, goods, and services.
Based on my conversations with buyers and sellers in today’s real estate market climate, I do not see any hesitancy to sell or purchase. Sellers have lived in their homes and have built up equity and are ready for a change in lifestyle. The Covid pandemic has shifted thinking for millions of people. Now that we are in a post-pandemic environment people are ready to move regardless of slightly higher mortgage rates.
Most certainly I do not believe this is the beginning of a recession as there are not enough warning markers at this point. A course correction in the markets is a good move right now. All of these markers lead me speculate that we are in the preliminary stages of a Market Correction and not a Recession.
If you would like more information on Lorri Brewer you can go to her website at www.lorribrewer.com or call her at 780-756-7653. She would love to hear from you and is always happy to help!
