What Does a Recession Mean for The Housing Market (2024)

A recession can impact the housing market in several ways. Typically, buyer demand weakens due to economic uncertainty, potentially leading to price drops or mortgage rates typically drop. However, the current situation is unique, with already high interest rates and low housing inventory. While mortgage rates might not fall significantly, some price softening could occur. Ultimately, the recession's impact depends on various factors, making local market analysis crucial for informed decisions.

Key Takeaways

• Recessions lower demand for homes with fewer qualified buyers
• Home prices often decline, though not in all markets
• Mortgage rates can fall substantially as the Fed tries to stimulate growth
• Carefully weigh pros and cons before buying or selling in a recession

What is a Recession?

A recession refers to a contraction in economic activity that lasts for at least a few months. The most common definition is two consecutive quarters of declining gross domestic product (GDP).

Other indicators like rising unemployment and declines in retail sales and industrial production can also signal or contribute to recessions.

Historic Housing Recessions in the U.S.

The United States has experienced several housing recessions throughout its history, often coinciding with broader economic downturns. While not every recession leads to a housing market decline, some notable examples stand out for their severity and impact:

1. The Great Depression (1929-1939): This period, triggered by the 1929 stock market crash, saw home prices plummet by up to 67% as unemployment soared and economic activity contracted. The housing market's recovery was slow and uneven, taking over a decade.
2. The Savings and Loan Crisis (1980s): Deregulation and risky lending practices in the savings and loan industry led to widespread defaults and foreclosures. While the national housing market did not experience a significant price decline, specific regions, particularly in the Southwest, faced substantial losses.
3. The Early 1990s Recession: This recession, though mild compared to others, saw a 1.9% dip in national home prices. However, the decline was relatively short-lived, and the market rebounded quickly.
4. The 2008 Housing Bubble and Great Recession: This event, widely considered the worst housing market crash in U.S. history, stemmed from a combination of factors, including easy credit, lax lending standards, and speculation in the housing market. Home prices nationally dropped by 19.7%, with some regions experiencing even steeper declines. The ensuing recession had a severe impact on the global economy.
5. COVID-19 Recession in 2020: When COVID-19 hit, the economy tumbled into a deep but brief recession from February to April 2020. However, the pandemic housing market eventually roared into its hottest period ever. Two years later in 2022, median home prices had risen over 40% above pre-pandemic levels due to ultra-low mortgage rates and shifting homebuyer preferences.

It's important to remember that not all recessions lead to housing market declines. In fact, four out of the last six recessions in the U.S. witnessed home price appreciation. This highlights the complex interplay of various factors influencing housing market trends.

Are We in a Recession Now?

As of 2024, the United States is not officially in a recession. This determination is made by the National Bureau of Economic Research (NBER), which uses a broader definition than simply two consecutive quarters of negative GDP growth.

Here's a breakdown of the current situation:

• Technically: The US did experience two quarters of negative GDP growth in the first half of 2022. However, the NBER considers a wider range of factors beyond just GDP, including employment, income, and industrial production. Based on their analysis, they haven't declared a recession for that period or since.
• Currently: Recent data suggests the US economy is still growing, with the fourth quarter of 2022 showing a 2.6% annualized growth rate. While some economists predict a potential slowdown in early 2023, it's not yet clear if it would meet the NBER's definition of a recession.

Therefore, while there have been concerns about a potential recession, the official verdict is no. It's important to stay informed by following economic news and analyses from reputable sources for the latest updates.

How Recessions Impact Homebuying Demand

Recessions can significantly impact homebuying demand, primarily through several key factors:

1. Decreased Affordability

• Job insecurity and income loss: During recessions, unemployment rates typically rise, leading to income insecurity and a reluctance among potential buyers to take on the financial commitment of a mortgage.
• Rising interest rates: Central banks often raise interest rates to combat inflation during recessions, making borrowing more expensive and increasing monthly mortgage payments. This further reduces affordability for potential buyers.

2. Reduced Confidence

• Economic uncertainty: The overall economic downturn can create a sense of uncertainty, leading individuals to postpone major purchases like homes until there's more stability.
• Negative wealth effect: If stock markets and home prices decline during a recession, it can erode household wealth, making individuals feel less financially secure and less likely to invest in a home purchase.

3. Tighter Lending Standards

• Increased risk aversion: Banks may become more cautious during recessions, tightening lending standards and making it harder for individuals to qualify for mortgages, especially those with lower credit scores or smaller down payments.

Combined Impact:

These factors can lead to a decrease in buyer demand, which can have several consequences:

• Slower home sales: With fewer buyers actively searching, the number of homes sold typically declines during recessions.
• Potential price stagnation or decline: Reduced demand can put downward pressure on home prices, although the extent of this decline can vary depending on various factors like market inventory and local economic conditions.
• Increased competition for available homes: While demand may decrease overall, there can still be competition for desirable properties, especially in areas with strong job markets and limited inventory.

It's important to remember that the impact of recessions on the housing market can vary depending on the severity and duration of the economic downturn, as well as local market dynamics. While recessions generally dampen demand, some segments of the market may be less affected, and opportunities may arise for buyers who are prepared and financially secure.

Pros & Cons of Investing in Housing During a Recession

For Buyers

Pros:

• Less competition from other buyers
• More negotiating leverage for price drops
• Potential to lock in lower mortgage rates

Cons:

• Higher unemployment risk before establishing roots
• Stricter lending standards
• Buying into further price declines

For Sellers

Pros:

• Less competition from seller inventory
• Motivated buyers still in market

Cons:

• Lower offers/longer time on market
• Paying more for next home purchase

For Investors

Pros:

• Lower purchase costs
• Higher rental demand
• Less cash flow competition

Cons:

• Lower and slower appreciation
• Tenant job loss risks

Carefully weigh the pros and cons before buying, selling, or investing during times of economic contraction. Markets vary greatly, so understand conditions in your specific area.

Do House Prices Go Down in a Recession?

Yes, home prices often decline during recessionary periods, but not universally across all housing markets. Broad national price indexes fell around 30% peak to trough during the Great Recession. However, some metro areas saw less drastic drops while others completely crashed.

Whether or not prices fall depends on the balance of supply and demand in a given market. Buyer demand drops substantially during recessions for the reasons already outlined. At the same time, the number of distressed sales (foreclosures and short sales) typically rises, increasing the proportion of discounted listings.

If supply outpaces demand, sellers must lower prices to attract buyers. Price drops encourage even more sellers to list their homes preemptively before values fall further. This kicks off a vicious cycle further driving down prices.

However, markets with more resilient economies and consistent housing demand can avoid major price corrections. Areas with steady population growth, restricted homebuilding, and desirable amenities have a better chance of emerging relatively unscathed.

Where Home Prices Could Drop

Predicting exactly where home prices will drop is difficult due to the complex interplay of various factors at the national and local levels. However, some areas may be more susceptible to price declines during economic downturns or periods of slower growth compared to others. Here are some general indicators to consider:

Factors that could indicate potential price drops:

• Areas with high dependence on specific industries: Locations heavily reliant on industries significantly impacted by recessions, such as manufacturing or finance, could see a decline in housing demand due to job losses and economic hardship.
• Overheated markets with unsustainable price growth: Markets that experienced rapid price increases in recent years, exceeding wage growth and fundamentals, might be more vulnerable to corrections if demand softens.
• Areas with high inventory levels: Locations with an abundance of unsold homes on the market could face downward pressure on prices due to increased competition among sellers.
• Locations with weak job markets and limited economic opportunities: Areas struggling with stagnant wages, high unemployment, or lack of job growth might see reduced buyer demand and potential price adjustments.

It's important to remember that these are just general indicators, and individual market dynamics can vary considerably. Conducting your own research and consulting with local real estate professionals is crucial for gaining a more accurate understanding of the specific risks and potential for price declines in your target area.

Here are some resources that can be helpful in your research:

• Local market reports: Look for reports from reputable sources like real estate agencies, industry associations, or local government agencies that provide insights into recent trends, inventory levels, and market forecasts.
• Price trend data: Websites and apps like Zillow, Redfin, and Trulia offer historical price data and market trends for various locations.
• Local economic data: Research employment statistics, job growth trends, and overall economic outlook for the areas you're interested in.

By combining this information with your personal risk tolerance and investment goals, you can make informed decisions about potential real estate purchases during economic downturns.

Should You Buy a House During a Recession?

In general, it’s better to wait to buy if possible. Even if you get a good price, it may keep dropping, leaving you immediately underwater on your mortgage. And if you lose your source of income, making payments gets difficult quickly.

However, some resilient buyers can take advantage of recession conditions:

• Downsizing Retirees: Older buyers with fixed incomes can use home sale proceeds from more expensive areas to lock in big upgrades in lower-cost locations.
• First-time Homebuyers: New buyers who kept their income and qualified for financing can benefit from reduced competition and a better negotiating position.
• Investors: Investors with cash reserves might spot opportunities to scoop up properties to flip or rent out in the future as prices recover.

Always account for your personal financial situation, risk tolerance, and outlook for the local economy before buying into a housing downturn. Time the bottom right, and you might secure an ideal home for years to come. Mistime it, and you’ll regret overpaying if values continue dropping.

Should You Sell Your House During a Recession?

Like buying, the decision to sell during an economic slump depends greatly on your situation, equity position, future plans, and market dynamics.

• Homeowners with minimal equity: Consider waiting out price weakness by staying put, so you don’t have to bring cash to close or take a loss.
• Retiring sellers: You might downsize now while values hold steadier in more affordable secondary markets. Then buy before bigger declines strike pricier areas.
• Luxury home sellers: Wealthy sellers can list higher-end properties attracting fewer buyers for lifestyle reasons like divorce or retirement relocation.
• Underwater homeowners: If you owe more than your home’s value, try negotiating principal reduction or loan modification before selling at a loss.
• Relocating sellers: If you must move for work, sell now before mounting job losses spread in your area. transactions have a smoother road.

Remember, housing markets vary by location and price segment. Work with a trusted real estate agent to decide if selling now or later makes sense in your specific circ*mstances.

How to Invest if You’re Saving for a Home

Investing while saving for a home:

• Consider your timeline: If you have more than 3 years until you need the money, you can consider low-risk investments like bonds or index funds.
• If you have less than 3 years, stick to safe options like high-yield savings accounts or certificates of deposit (CDs).
• Keep it liquid: Your down payment needs to be easily accessible, so avoid investments with lock-up periods or high volatility.
• Diversify: Don't put all your eggs in one basket. Spread your savings across different asset classes to minimise risk.
• Talk to a professional: A financial advisor can help you create a personalised investment plan that aligns with your risk tolerance and homeownership goals.

If The Housing Market Crashes What Happens to Interest Rates

If the housing market crashes, interest rates are likely to go up. Higher interest rates reduce demand for housing because the cost of homeownership increases - homes become less affordable. With fewer home buyers able to obtain financing due to higher rates, demand declines. The drop in demand then leads to decreasing home prices. So in a housing downturn, buyers face the dual obstacles of high interest rates and falling home values.

Is It Better to Have Cash or Property In a Recession?

There's no one-size-fits-all answer, as both cash and property have advantages during a recession:

• Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities.
• Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.

Ultimately, the best option depends on your individual circ*mstances, risk tolerance, and financial goals. Consider seeking professional advice for personalized guidance.

What Happens to Mortgages During a Recession

During a recession, mortgages can be impacted in several ways:

• Interest rates: Typically, central banks lower interest rates to stimulate the economy. This can lead to lower mortgage rates, making it more affordable to buy a home or refinance an existing mortgage. However, the recent economic situation is unique, and interest rates might not fall as drastically.
• Home prices: Economic uncertainty can lead to weakened buyer demand, potentially causing home prices to decline. This could benefit buyers but might negatively impact existing homeowners.
• Foreclosures: If job losses and income reduction become widespread, foreclosure rates might increase as homeowners struggle to make mortgage payments.
• Loan availability: Lenders may become more cautious during recessions, tightening lending standards and making it more difficult to qualify for a mortgage.

It's important to remember that these are general trends, and the specific impacts of a recession on mortgages can vary depending on the severity and duration of the economic downturn, as well as local market conditions.

Conclusion

Economic downturns and recessions invariably cause declines in housing market strength. Reduced demand from buyers, sellers, investors, and tenants spreads pains across most real estate segments.

While home values often correct lower in recessionary periods, markets don’t all behave uniformly. And some potential buyers stand to benefit from decreased competition and faster deals. During these complex times, rely on trusted professionals to help determine your best personal course of action.

Stay tuned to economic trends, tailor your financial plan accordingly, and you’ll be well-positioned to reaction nimbly as conditions dictate. With prudent planning, savvy players can not only weather recessionary storms in the housing market - but actually thrive because of them.

How Long Did It Take for House Prices to Recover After 2008

While the national picture provides a general idea, it's important to remember that housing market recoveries can vary significantly by location. Here's a breakdown of the national recovery timeline after the 2008 housing crisis:

Timeline:

• 2006-2007: Housing market starts to decline.
• 2008: Housing prices plummet, reaching their lowest point in 2011.
• 2011: Recovery begins, with prices slowly rising.
• Late 2012: Nationally, house prices reach pre-crisis levels again.

Frequently Asked Questions (FAQ)

Do home prices always fall in a recession?

No, home prices do not always decline nationally during recessions. Much depends on the depth of the downturn and how low mortgage rates offset economic weakness. Supply shortages may also prevent declines.

Should I buy a house during a recession?

Buying a home during a recession can make sense if you find attractive opportunities and can shoulder the risk. But delaying offers more certainty once demand rebounds. Consider your personal factors and risk tolerance.

When is the best time to sell a house in a recession?

Most experts say avoiding a recession is best if possible when selling. Demand typically drops while home sit longer on the market. But economic necessity still forces many sales.

How long do housing recessions last?

There’s no fixed duration for housing recessions tied to economic downturns. But depressed activity, reduced prices and stalled construction often persists for 1-2 years on average.

What markets face the biggest price risks in a recession?

Overvalued and investor-heavy markets often correct more substantially. So do areas relying on tech, finance and struggling industries. But all markets see impacts from shrinking demand during downturns.