Is Housing A Good Hedge For A Recession?
I have always heard that housing can be a good hedge during a recession. So let’s take a look at the state of housing and see what things look like:
A Historical Look:
U.S. home prices have historically grown on average at ~4.5% a year. Last year, we saw prices go up over 20% and Case-Shiller just said that things have cooled down a bit to 19.7% (😊) in Q2. However, in the past 60 years, housing has only had two negative years (-0.7% in 1990 and -0.2% in 1991) until the Great Financial Crisis (GFC). For those 6 decades, 10 of the last 11 recessions have had a minimal impact on housing; the one exception being the recession caused by housing. Overall, we see a high correlation between housing and CPI (0.96). Yes…housing is an important input to the CPI calculation but the two have moved in a similar fashion and, overall, housing has been a good hedge against inflation:
Broadly speaking, corporate debt is much more levered than household debt. Despite a spike in 2020, household debt is actually diminishing while corporations are seeing an increase level of leverage:
The State of the Homeowner:
One, of quite a few, stark differences between the state of the homeowner in 2008 compared to today is that the majority of borrowers have fixed rate mortgages. In 2006, adjustable-rate mortgages (ARMs) made up 50% of all mortgages. Today, only 2% of all mortgages are ARMs. At the same time, home prices and rents are going up. Thus, for homeowners, the best and most affordable housing option is to stay in the mortgage and home that they are presently in:
U.S. homeowners own a high percentage of their home. Thus, from a balance sheet and cash flow perspective, homeowners are looking pretty good. Nearly 40% of owner-occupied homes are owned free and clear and that trend continues to rise.
Despite the average 30-year mortgage rate rising to the mid-5s (5.54% as of 7/21/2022), the U.S. has the lowest mortgage rate on outstanding debt in 43 years down to 3.3%. At these numbers, the mortgage has essentially become the asset on the homeowners balance sheet:
Mortgage credit scores have improved from lows in the 2000s. Typically, underwriting relaxes in “good” times until an issue arises. However, since the GFC, the median credit score on mortgage originations has remained high; safely above the “excellent” scores:
Previous recessions have had a limited impact on housing outside of the GFC. Looking at the state of today’s homeowner, we might not have ever seen a stronger housing market especially in the lowest tiers of the housing market where there is a real and significant supply/demand imbalance. We will probably see the housing market cool, and that would be most welcome. But the American homeowner appears to be a in a strong position to weather a recession and the housing market appears to continue to be a hedge to recession.