Aug 23 2022

How recessions impact the housing market

Recession worries? Home prices probably won’t drop, but mortgage rates might.

Whether or not we’re currently in—or about to head into—a recession has become a hotly debated topic. Last year, only 12 percent of economists believed that we’d see an economic recession by this point, according to the Wall Street Journal’s Economic Forecasting Survey. This year, the number has risen to 49 percent of economists who forecast that a recession will occur within the next year.

When a predicted economic recession is making headlines, homebuyers naturally want to know: Is it still wise to buy a house? Or should I put my dreams of homeownership on hold until the economy stabilizes?

Reviewing the historical trends surrounding past recessions can help us better understand how the housing market is likely to respond. It can also help calm some fears.

What happens to the housing market in a recession?

A recession is normally defined as two consecutive quarters of GDP (gross domestic product) decline. However, there are some characteristics of our current economy—like its wage growth and strong job market—that are leading authorities to declare that we’re simply in a period of transition. An economic recession has yet to be made official by the National Bureau of Economic Research.

Until then, we can revisit themes from past recessions to get a better idea of what might lie ahead:

1. A recession doesn’t necessarily cause home prices to fall.

Historical data confirm that home price drops aren’t a definite outcome of a recession. The chart above, tracking economic recessions starting in the 1980s, shows that housing prices have actually appreciated in the majority of the past six recessions. Historically, a slowing economy doesn’t automatically mean the same for home values.

Right now, many people are referencing 2008’s housing crisis and wondering if we’re heading toward the same fate. The difference is that today’s housing market isn’t about to crash—because of several distinct factors. This is important to know if you’ve shied away from buying a house for this reason.

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In fact, today’s home price appreciation is one of the factors that is helping to hold off another crash.

While higher housing prices are presenting a challenge to many first-time homebuyers, Rick Sharga, ATTOM Data executive vice president of market intelligence, explains, “Homeowners continue to benefit from rising home prices. Record levels of home equity provide financial security for millions of families and minimize the chance of another housing market crash like the one we saw in 2008.”

2. A recession does cause a drop in mortgage rates.

Before the last recession, Ben Carlson, writing for Fortune, detailed how mortgage rates normally decrease when the economy declines: “Over the past five recessions, mortgage rates have fallen an average of 1.8 percentage points from the peak seen during the recession to the trough. And in many cases, they continued to fall after the fact as it takes some time to turn things around even when the recession is technically over.”

Mortgage rates have risen as the economy recovered from the pandemic; this is a good sign. Mortgage rates are still below the historical average. However, if the economy weakens again and causes rates to fall, this can provide an indirect benefit to homebuyers. Lower rates, as we saw during the pandemic, make it much more affordable to purchase a house. Homeowners who refinance may also get the chance to save.

It’s not guaranteed that history will repeat itself, but a recession-related rate drop does appear likely based on these figures.

In summary: While it’s understandable to have anxieties about seeing “another 2008,” most recessions have not had such dire outcomes. You may not need to fear a potential recession if you’re thinking about buying or selling a house. The evidence shows that, in most economic recessions, home prices have held steady, and mortgage rates have declined.

Americans still value homeownership in the midst of this uncertainty. Over the last four quarters, the U.S. homeownership rate has only continued to increase. More than half of the population owns their home, for reasons like building prosperity and securing a fixed monthly housing expense to hedge inflation. Even as the economy ebbs and flows, homeownership remains a safe bet for most people.

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