Photo by Kenny Eliason on Unsplash

Michaela Phillips, Synergy One Lending

Michaela Phillips, Synergy One Lending

When the market adjusts in any direction, it can cause alarm. However, that’s the natural order of a healthy market – to wax and wane reflecting economic trends, politics, and world events. Currently, the market is settling down from the past few red hot years thanks in large part to a federal interest rate adjustment. How can you tell if we are entering a recession or a simple market correction? Here’s what you need to know:

What’s a recession?
A recession occurs when economic activity (defined by gross domestic product) dips consistently for two consecutive quarters. The National Bureau of Economic Research (NBER) defines a recession a little more loosely as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, income, employment, industrial production, and wholesale-retail sales.” The current market in the U.S. could reflect a recession upon initial glance because of inflation, supply chain problems, and the Russian-Ukraine war. However, U.S. GDP has increased from Q2 to Q3 and from Q3 to Q4.

What is a market correction?
A market correction (or pricing correction) is defined by a percentage-based decrease in the market. When the market declines at least 10%, but not more than 20%, a pricing correction is happening. The S&P 500 and Nasdaq Composite are indicators that represent that market on the whole. If we look at the S&P 500 peak at $4,818 in 2021, we see that it is down more than 10%, but not more than 20%.

A correction is a sustained, slow decline in the overall value of a market, as measured by its index. Corrections can happen across the board like to the S&P 500, or can happen on a smaller scale, like to the shares of a software company.

The market is made to fluctuate
Riding out market corrections is part of investing, and those who invest in real estate can rest assured that a correction isn’t indicative of an incoming recession. Pricing corrections are happening all the time. However, when they happen on the tail of a redhot economy, it can trigger a panic response in everyone. A correction, like the one we are currently experiencing, is often triggered by a world event (global pandemic, war, etc.). Events like this cause investors to participate in more cautious financial behavior, which can cause the entire market to slow.

What does this mean for the housing market?
There’s hardly ever a right or wrong time to buy or sell a home. It’s one of the largest financial decisions people make and is incredibly particular to one’s own personal situation. However, during a booming market, like the one we’ve been experiencing over the past two years, sellers may benefit more than buyers. As the market cools off, the reverse happens. Homes become more available, people think twice about buying because interest rates are higher, and buyers are able to negotiate more aggressively to secure a deal that economically benefits them.

Working with a knowledgeable and qualified loan officer can allow home buyers to better understand the current market and how they can use it to their advantage.

By Michaela Phillips. Michaela is the Senior Lender for Synergy One Lending in Boulder. She enjoys teaching her clients the pros and cons of being a Real Estate Investor. Contact Michaela at 303.579.5517, e-mail [email protected] or visit michaelaphillips.com. NMLS: 312874.