Sep 19 2023

Here’s how recessions impact the housing market


What happens if we enter a recession? Home prices probably won’t drop—but mortgage rates might.

There’s been talk of a recession for quite some time. While forecasts frequently change, roughly half of economists now anticipate a (potentially mild) downturn within a year.* Some believe that this could help the housing market.

To find out if this might be true, we can review the historical trends surrounding past downturns.

What happens to the housing market in a recession?

When a predicted downturn is making headlines, homebuyers naturally have questions.* Many want to know: Is it still smart to buy a house? Or should I wait until the economy stabilizes?

A recession is normally characterized by two consecutive quarters of negative GDP (gross domestic product) growth. But lately, economic growth in the U.S. has held steady, despite the Federal Reserve’s rate hiking cycle. The National Bureau of Economic Research, which defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months,” has yet to make it official.

Until then, revisiting themes from the past can give us a better idea of what lies ahead:

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


Historical data confirm that home price declines aren’t a definite outcome of a recession. The chart above, tracking economic downturns starting in the 1980s, shows that housing prices have actually appreciated in the majority of the past six. 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’s 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, has said, “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.”

Those “looking forward” to a mild downturn believe that it would benefit the housing market by causing home prices to decline. This would hinge on homeowners selling or facing foreclosure, freeing up supply and bringing down prices. However, mortgage delinquencies recently hit an all-time low, making mass foreclosures unlikely.

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

Before the last downturn, 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 [it’s] technically over.”

Mortgage rates have risen as the economy has recovered from the pandemic; this is a good sign. Mortgage rates are still below the historical average.

But 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 rate drop does appear likely based on these figures. Should we enter a mild downturn, the Federal Reserve may also cut interest rates to help stimulate economic growth. Indirectly, Fed rate cuts can help to reduce mortgage rates.

In summary: While it’s understandable to have anxieties about “another 2008,” most downturns have not had such dire outcomes. You may not need to fear economic decline if you’re thinking about buying or selling a house. The evidence shows that home prices typically remain stable, and mortgage rates typically decrease.

Americans still value homeownership, even in uncertain times. After the homeownership boom in the pandemic, the U.S. homeownership rate of 66 percent has stayed relatively the same. More than half of the American population owns their home, for reasons like building long-term prosperity and hedging inflation. As the economy ebbs and flows, homeownership remains a safe bet for most people.

Find peace of mind: Contact your local Academy Loan Officer.

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