How Potential Recessions Impact Housing

One of the biggest takeaways from the Great Recession of 2008 was the crash of commercial and residential housing. However, these two are not synonymous with each other. A recession, which would still are not even sure if one will happen, does not lead to a housing crisis every time. Homeowners should know this, as there will be a lot of talk about a recession and a housing crisis in the coming months. One important thing to remember is that we still have a lack of inventory in housing, the exact opposite of the real estate market crash in 08. Everywhere in the news, you can see experts continuing to warn about the risks of a recession. If this is true, an economic slowdown does not directly mean homes will lose value in the market. Here is how potential recessions impact housing.

What Is A Recession?

According to the National Bureau of Economic Research, defines a recession as this:

“A recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators. A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”

For those that are saying a housing market bubble or crash is imminent because of a potential recession, there is data that shows otherwise. Let us take a look at some historical data. Over the last four decades, we have seen a total of six recessions in the economy. According to the graph that is displayed below, housing prices only fell two of those six times. One of those recessions, the one in 2008, was specifically caused by housing and fraudulent loans. Other than the two instances where home prices decreased, home prices actually increased on average by 5.5%. This is a good sign for homeowners, as we reach a point where we could see a continued economic slowdown due to the Federal Reserve.

How Potential Recessions Impact Housing

A visual representation of how the last six recessions have impacted housing prices.

Historical Data And Housing

The first instance that is shown on the graph where home values depreciated was in the early 1990s. In this time, home prices hardly fell by anything that is worth noting. Over time, markets have something called “breadths” where prices need to take time to cool. This happens especially after times of great returns or “gains” in certain markets. While it was still during a recession, housing hardly took a hit compared to other asset classes. When housing finally came crashing down in 2008, home values ended up almost 1/5th lower. A drop of 20% in home prices might seem like a lot, but for those who bought in the years prior, some were still able to come out ahead. The market leading up to 2008 was hot, prices were appreciating rapidly as well. However, the biggest difference between then and now is inventory.

How Potential Recessions Impact Housing in 2022 and 2023

This is why the housing market today is not in a bubble that is about to burst. And, even with mortgage rates hitting the highest since 2009 at 5.3%, that is still fairly low. It is being predicted that it will take close to 8% on mortgage rates to finally slow the market because it would be too expensive. We are a far way from this, and if the Federal Reserve raises rates that high, we will see a recession. However, the fundamentals are different today. Lending standards are much tighter. Adjustable rate mortgages are used significantly less than before. Also, it is much harder to get a loan nowadays, as you can no longer get a NINJA loan (no income, no job, no assets). We should not assume that we are going down the same path as 2008.