How Recessions Impact Housing

How Recessions Impact Housing

While it has been a while since we have seen a true recession, the word holds some weight in the housing market. Ever since the 2008 housing crash, the word recession gives those involved in real estate, whether professionals or clients, the chills. While this would be the most telegraphed recession ever, there is a small chance that it will be as negative as the 2008 recession. But for those who are wondering how recessions impact housing, look no further.

Are We In A Recession?

There is a lot of talk about if we are already in a recession, or if one is coming in the coming year. However, even if we are in a recession, it is important to realize that most people are predicting a mild one when it comes to housing. Recessions impact housing in a different way than other industries. There is also talk about how a coming recession could be short lived and lead to the decrease in inflation finally. According to CEO Outlook from KPMG:

“Global CEOs see a ‘mild and short’ recession, yet optimistic about global economy over 3-year horizon . . . More than 8 out of 10 anticipate a recession over the next 12 months, with more than half expecting it to be mild and short.”

Recession Impacts Housing

To further add to that discussion, housing has typically been a leading sector in terms of rebounding from a recession. Recessions impact housing in different ways, and looking back at data shows that housing actually remains strong in most recessions. Ali Wolf, Chief Economist at Zonda says:

“Housing is traditionally one of the first sectors to slow as the economy shifts but is also one of the first to rebound.”

Another positive that can come from the negative of a recession is mortgage rates falling. Mortgage rates typically fall before actual rates do, in a bid to stimulate housing growth and economic output. Historically, data helps paint a picture of how recessions impact housing. The cost of financing a home has skyrocketed to multi-decade highs over the last few months. Any sign that can add relief to the cost of financing will be welcomed by buyers, as long as the recession is not severe. The graph below shows that during each technical recession, the economy slows and mortgage rates go down. Typically, a recession also impacts inflation and allows us to continue to see decreases in month-over-month prices.

Mortgage Rates And Recessions

Fortune explains mortgage rates and how a recession impacts housing:

“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.”

While past performance is not an indicator of future results, it is safe to say that we could see a drop in mortgage rates. This drop will likely come as the Federal Reserve stops raising rates due to economic slowdown. Any relief in pricing and financing costs could lead to another frenzy in the market like we saw in the pandemic.