via Forbe:
All politics aside, many economists are predicting a recession coming down the pipeline. What could that mean for people who live with large amounts of debt hanging over their heads, like mortgage debt? It could mean that homeowners will get creative to cover their expenses, and real estate innovators are already working to provide them with alternative methods for coping with financial hardship.
Booming Economies Lead To Economic Slumps
Right now, economies all over the world are booming, and recent tax cuts have meant that business looks brighter than ever for many corporations (and the employees they pay).
But most economists agree, just like most scientists do, that what goes up must come down. With such a spectacular period of up, many economists are predicting that the slump is bound to occur sooner rather than later — and that it could get ugly. There are several precarious situations worldwide that could turn the financial tides quite suddenly, like the trade wars that are looming between the U.S. and several other countries, even aside from the basic economics at work.
In my opinion, despite that (and maybe because of it) economic growth has steadily occurred over the past 10 years, the other shoe is about to drop. Whether it’s the changes in tax law, a Chinese trade war or some other forthcoming event that will lead to a downturn in the economy, it’s on the way. Things are almost too good in real estate, with homes selling quickly and for more than market value consistently in many markets, the energy is almost frenetic. It leads me to believe that we’re reaching a tipping point.
What Does A Potential Recession Mean For The Average American?
One of the most important things we need to understand is that many Americans are in debt up to their eyeballs. In 2017, combined American credit card debt reached a staggering $931 billion according to an analysis by NerdWallet. American households that carry credit card debt report having an average of over $15,000 owed — and that’s only one kind of debt. The overall average debt carried by American households is $133,568. More importantly than the bare-bones numbers showing how much we owe, the numbers show that the debt we’re accruing is growing much faster than our incomes.
Simply put, we owe a lot, and when things we need to live get more expensive and unemployment rises as so often happens during periods of economic recession, it’ll get a lot harder for many Americans to pay back what they owe. It’s an issue that could affect a good portion of the population should recession hit.
What’s The Answer For Americans In Debt During Recession?
There lies a likely answer in the assets that people already have. Despite the fact that Americans are carrying plenty of debt, many also have home equity. According to a report by the Urban Institute, 52 million American homeowners have access to home equity. Traditionally, HELOC loans and reverse mortgages have given people access to at least part of the money they’ve sunk into their house, but with a recession looming, other options for tapping home equity will potentially see a boom. This is because both of these equity release options come with quite a lot of conditions: HELOC loans have credit standards that many desperate people just can’t meet, and reverse mortgages are restricted to those of retirement age.
Financial and real estate tech firms have been developing new ways to help homeowners access their equity like residential sale leaseback and quick home sales platforms like the one Zillow is developing, both of which can give homeowners access to the money they’ve sunk into their house in record time. (Full disclosure: My company is one of the first to offer residential sale leaseback.) We developed this platform to open up new options for homeowners to tap their home equity quickly in the event that their debt becomes more than they can handle, and other companies are following suit to provide new and innovative solutions that release homeowners from their home debt. Once equity has been tapped, it’s crucial that the money received is spent (and more importantly, saved) wisely and that new debt isn’t accrued to land people back in the same position they were in before, but without a feasible out this time.
If the worst happens in a recession, it’s likely that the debt so many Americans carry will push them to explore new options to remain above water.