Housing Recession

We have all heard it, recession this, recession that. But, what does a recession actually mean for the housing market? According to a recent study from the WSJ, more economists are starting to price in a recession in the coming 12 months. As more time goes on, this number of economists will likely continue to grow. So, is a housing recession on the way? And what does that mean for buyers and sellers?

Economist Spotlight

In July 2022, the number of economist predicting a recession has risen to 49% from 12% from the year prior. As we hear more recession talks over the following months, there are concerns already reaching the housing market. A big question about a housing recession is: should I wait until after the recession to buy a home?

Well, let us look at the historical data from passed recessions to get a general idea of what to expect. This data will likely help provide some information about a housing recession, and what to expect.

Recessions And Housing

Recessions are nothing to mess around with. People lose their jobs, houses, and livelihoods. However, there is one thing about recessions that does not always seem to drop. That is housing prices. In fact, because real estate is an illiquid investment with heavy transaction costs, the market is less susceptible to volatile swings. As you can see below, besides 1991 and 2008, home prices actually rose in the 12 months after being in a recession. 2008 is the glaring outlier here, and a housing recession then was based on fraud, and a few bad actors.

How Potential Recessions Impact Housing

How the last six recessions have impacted housing prices.

Housing Recession Fears

The fundamentals of this housing market are a lot stronger and on better footing that 2008. Lending standards have improved tremendously. The removal of NINJA loans (no income, no job, no assets) and fall in relevancy of ARM (adjustable-rate mortgages) will likely increase the chances housing remains strong.

Do not assume we are on the same trajectory as 2008 just because the algorithm generated headlines said we are. In reality, dooms-day news gets clicks and views, so it is important to not be bias. The odds of a housing market crash as severe as 2008 are very low, and anyone who says otherwise is probably getting paid-per-click.

Are We Headed For A Housing Recession?

In the base case, recessions actually can benefit buyers in some ways. While it may be harder to get approved and could carry macroeconomic risk, buying can sometimes be easier. In each of the past 6 recessions, every one led to a decrease, or ‘cut,’ in mortgage rates. The number one way of stimulating our economy is to lower borrowing costs for everyone. This encourages economic activity, even during downturns and slowdowns.

Housing Recession?

Mortgage Rates During Housing Recessions

The difference between now and the past, however, is inflation and the Federal Reserve. We have just started a rate tightening cycle to tame decades-high inflation. We are only 4 rate hikes into the cycle, and we are already seeing the impact. However, the Federal Reserve has made it clear to markets that there will be more increases ahead. Even with this guidance, the market is not listening to the Fed. We have started pricing in rate cuts for 2H of 2023, which will most likely not be happening.

Bottom Line

Recessions are scary. Fear mongering online is scary. However, this should not scare you away from buying your next house. In every case, real estate, like most investments, have never had a 30 year period where prices did not increase. So sure, in the short term, if housing prices decrease, owners will be scared. However, if they look into the longer-term trends of assets, they are in a good position.