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What Could a Recession Mean for the Housing Market?

Jennifer Wauhob

Serving the entire Katy and West Houston real estate market for 12 years, Jennifer was named a Top 20 Under 40 Rising Star in Real Estate by the Houst...

Serving the entire Katy and West Houston real estate market for 12 years, Jennifer was named a Top 20 Under 40 Rising Star in Real Estate by the Houst...

Sep 15 6 minutes read

Wherever you look in the news right now, the word “recession” keeps coming up. Is the US in a recession, and if not, will it be soon? How would a recession impact the housing market?

We totally get it, these are understandable questions right now. Whether you are a homebuyer or a home seller, you will want to prepare yourself for the potential consequences of a recession. Home sellers have enjoyed a seller’s market conditions for the past two years, but it may be time to adjust expectations as the real estate market shifts. Let’s explore what a recession entails, how likely the US housing market is to suffer from one, and what you need to bear in mind if you’re planning to buy or sell a house in the foreseeable future. 

Is the US in a recession?

No. According to the latest GDP report, the US economy has avoided a recession, even though the rate of economic growth is slowing while inflation keeps rising. The US GDP shrank by 0.9% in the last quarter, while the inflation rate has risen to 9.1%. This is leading to rising interest rates and reduced consumer spending. Although the economy is not in the best of health, we are not yet in a recession technically and will unlikely to be in one until at least 2023.

What does a recession mean for the real estate market?

Recessions do not impact the housing market as much as you may think.  In fact, out of the last 6 recessions the US has gone through home prices only fell during two of them, and one of those was in 2008 which the recession was essentially caused my the mortgage crisis.  With housing inventory still low and and demand remaining high, we do not anticipate home prices to fall even if a recession materializes.    

Will the housing market crash if we go into a recession?

Not necessarily. In fact, given the current unique housing market conditions, this is unlikely. “This is not the same market of 2008,” Odeta Kushi, First American’s deputy chief economist, told Insider. The downfall of the housing market in 2008 was its reliance on cheap mortgage loans that had put a vast number of homeowners in a precarious position. Put simply, people had been given mortgages they could barely afford, and the financial crash made them unable to keep their homes. In many cases, mortgages became unaffordable within weeks. Many homeowners also found themselves in an underwater mortgage situation where the amount they owed on their home was more than the value of the home. This trapped people in homes they were unable to pay for yet were also unable to sell. 

Today’s real estate market is fundamentally different. The US housing market is in much better shape through a combination of tougher lending practices and unprecedented home value growth since the pandemic. Almost 50% of US homeowners now have equity-rich housing. Meaning they own at least 50% of their homes. This makes a repeat of the 2008 housing market scenario extremely unlikely.

Having said that, it is likely that the housing market will continue slowing over the coming years. We won’t see the 20% rate home price growth of 2020-21 again. That much is certain.

What would a recession mean for home buyers?

A recession impacts what it costs to buy a home as mortgage rates tend to change. Affordability criteria also tend to become more stringent in other ways. Lenders may start asking for bigger down payments in order to reduce their lending risks, and they will pay closer attention to buyers’ job situations. Insecure or self-employed status usually becomes a harder sell when getting a mortgage during a recession. 

However, none of that means that a recession makes it impossible to buy a home. If you have a steady income and enough saved for a decent downpayment, your situation won’t change dramatically. Of course, having access to an emergency savings pot is a very good idea with the possibility of a recession growing. Having savings to fall back on is often the difference between being able to keep a home and foreclosure.

What would a recession mean for home sellers?

Home sellers may worry about a reduction in their home values, which may result either in a reduction in the profit from a home sale or in the dreaded negative equity situation. Home sellers with little equity built up are particularly at risk of this scenario. All home sellers should mentally prepare themselves for the end of a seller’s market situation should a recession hit.

Again, however, these are unlikely case scenarios in 2022. The housing market is not about to crash. Some sellers shouldn’t expect lower home values, but they should expect more modest growth. Home prices have been so high for the past two years that it will take a considerable amount of time before we can even consider the possibility of home prices falling. 

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Whether you're thinking about selling your home or getting ready to purchase your dream home (or anywhere in between) it's important to educate yourself about the housing market. We publish new content every month that can help!

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