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What Happens To The Housing Market During a Recession?


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There’s a lot of talk about an approaching recession nowadays, with economic experts flouting odds of over 50% in favor of an economic downturn.

Several economic indicators, coupled with rising gas prices and interest rates, paint a bleak picture for 2023. Yet, the job market is holding firm, as is the real estate sector.

Strong employment and steady real estate prices fly in the face of what we know about recessions.

As a homeowner, property investor, or potential buyer, you’re probably wondering what happens to the housing market during a recession.

Keep reading for some insights and likely scenarios.

What Happens to the Housing Market During a Recession?

By definition, a recession includes a decline in economic activity. It also features decreases in employment, income, retail sales, and production.

When this happens, it impacts the U.S. GDP, but what happens to home prices during a recession?

Unemployed people can’t pay their mortgages, leading to foreclosures, as well as an upswing in available homes. Likewise, low earnings, higher interest rates, and economic uncertainty mean fewer people are likely to consider committing to a new mortgage. 

This textbook scenario indicates that home prices should drop during periods of low demand when there are many homes available for sale. Yet, every market is unique, and so is every recession.

For starters, we’ve already outlined that increased employment goes against the available information regarding recessions.

So, what happens to the real estate market during a recession? The short answer is, ”it depends on numerous things.”

One way to predict what may happen in the future is by looking at the past. 

Past Real Estate Recession Prices in History

The real estate industry has recently undergone an unprecedented boom. In the current situation, even a return to normality might seem like a major crash.

Does this mirror the housing bubbles of previous years, though, and is it about to burst?The Great Depression

The Great Depression of the 1930s saw home prices plummet by 67% due to the huge number of foreclosures at the time. In the modern era, stringent regulations should prevent this occurrence. 

A major driver of this recession was the stock market crash of 1929 created by a failing agricultural sector, low wages, and excessive debt. The existence of many large loans that the banks could not liquidate only added fuel to the fire.Real Estate During the Great Recession

Between 2000 and 2007, the U.S. real estate market saw steadily increasing home prices due to a spike in subprime lending.

When interest rates normalized, thousands of people found themselves with mortgages they could no longer afford. As a result, lenders couldn’t recoup the vast sums of money they’d doled out during the good times.

Several large companies, like Lehman Brothers, folded at this time. This caused widespread panic and serious challenges for those in need of finance to keep their businesses afloat.

At the same time, thanks to numerous socio-economic factors, unemployment declined to almost match the record lows of the post-WWII era.

The result was the biggest housing market crash since the 1930s, with home prices dropping by over 26%. 

Shorter Recessions and Home Prices

It’s vital to remember the Great Recession had close ties to the real estate market. Recessions brought about by other economic indicators don’t impact the housing market as much.

In the 1980s, two shorter recessions saw an increase in home prices, and the same happened in 2001. Statistics show only the 1990 and 2008 recessions had a negative impact on home prices. 

Shorter recessions tend to impact only certain housing markets. This is especially noticeable where homes are selling at higher price points.

Moderately priced homes see correspondingly moderate price declines. 

There’s no doubt that the pandemic presents a unique set of circumstances. This makes it difficult to predict how things will pan out if the housing bubble bursts.

During hard times, the federal government reduces interest rates to increase spending and boost the economy. 

The federal government took swift action regarding this aspect in 2020. They’re still working hard to create employment and encourage economic growth, although war-related fuel price hikes haven’t helped the situation.

Due to these actions, it seems unlikely that a recession will mimic the impact that the Great Recession had on the housing market, despite steadily increasing interest rates in 2022.  

Factors That Impact Real Estate During a Recession

Supply and demand are always the drivers behind real estate prices, and anything that affects these two things can cause a housing price crash. These factors include increased interest rates, low employment, and a scarcity of mortgages.

Lower house prices aren’t always a bad thing though, sometimes positive aspects like the increased availability of affordable housing can lead to cheaper home prices.

During times of economic turmoil, some housing markets are harder hit than others. This is how a recession can impact home prices in different markets: 

Higher Priced Properties Devalue More

Wealthier homeowners take greater cognizance of the bigger financial picture when buying homes. So, in times like the present, they might hold back on buying expensive homes due to future uncertainties. 

There’s more chance that external factors, like stock market prices, impact these individuals, causing hesitancy. That means reduced demand for high-end, expensive properties, and a subsequent drop in prices. 

First-time homeowners and lower-end buyers focus more on interest rates, so as long as these remain steady, they still buy houses.  Due to this, homes in the low to mid-price range stay on track for longer during a recession. 

Location Affect Pricing

Historically, metropolitan areas experience a more drastic decline in prices than rural ones. This is partly the result of a vicious cycle, as urban home buyers look to more stable markets out of town.  

Industrial Affects

Traditionally, home prices in cities centered around the energy industry suffer most in a recession. Areas with a higher emphasis on economic staples experience slower price declines.

Newer Developments are at Greater Risk

As financial difficulties soar during a recession, businesses start to liquidate, including those in the construction industry. For this reason, homebuyers view new developments as riskier bets.

That means developers are less likely to sell homes for fear of builders going out of business without completing their projects. In uncertain times, buyers will rather spend their money on established communities, where everything is already in place.

Navigating the Real Estate Market During a Recession

While all the signs point to another recession in 2023, or sooner, the real estate market is in a good position to hold steady if that does come. It might even present some positives in an otherwise bleak outlook.

The industry has come a long way since 2009, thanks to innovations such as brokerages like Redfin, the iBuyer industry, and dedicated real estate companies helping buyers and sellers save on transactions. These savings are particularly important in times of economic distress. 

A downturn in housing prices could have the following positives:

Greater Affordability for Home Buyers

In the last two years, the increase in home prices has far outstripped the inflation rate. That means home prices are increasing at a rate that far exceeds the average buyer’s wage increase during the same period.

Due to this, a decrease in home prices will bring welcome relief for first-time or budget-conscious homebuyers. 

Renter Relief

Home prices and rents are closely related. That means most renters are facing fixed monthly costs that far exceed their annual increase in earnings, too.

In this light, many real estate experts say they would welcome a real estate price deceleration that brings home prices more in line with what people can afford.

They expect prices to continue their slow downward trend, rather than crash suddenly. 

What Are the Next Steps for Buyers and Sellers?

If you’re selling your home right now, you should consider delaying the sale until the market picks up again. Alternatively, you should try to sell as fast as you can before prices plummet too low. 

The aim behind increased mortgage rates is to bring down demand in line with supply. That’s already happening, which could put a lid on further increases and bring the real estate market back to normal.  

With fewer buyers, it will take a lot longer to sell your home, and you’ll probably need to drop the price a few times in the process. If you can, either delay selling your home or try to find a cash buyer. 

Likewise, buyers should hold on until mortgage rates settle, and allow home prices to go as low as they dare. Those in the know suggest the feds may stop the rate hikes toward the end of 2023. 

Buyers should also remember that current interest rates aren’t much higher than they were before the federal government slashed them to historic lows in late 2020. If you have the money, buying a home during a recession isn’t necessarily a bad idea. 

Benefits of Buying or Selling a Home During a Recession

It’s probably safe to say we won’t see another recession driven by the housing market after the hard lessons learned from 2007 to 2009. Yet, should decrease due to rising mortgage rates, restrained spending, and decreasing demand.

In this regard, buying and selling homes in a less severe recession can have its perks.

Currently, the number of homes for sale is still well below normal levels, so decreased demand is unlikely to have a devastating effect on home prices. On the contrary, lowered prices allow financially stable first-time buyers to secure a home they can afford. 

Low house prices and rising interest rates are the ideal scenarios for cash buyers on the hunt for a good deal. So, sellers have more chance of attracting one of these preferential sales

Selling to a cash investor is faster and cheaper than a conventional sale. You’ll save on real estate agent’s fees, staging your home, and some closing costs. 

Homeowners who have considerable equity in their homes can benefit from selling and buying at the same time.

If you sell your home before prices drop too low, you could still end up making a small profit. Plus, you’ll benefit from a cheaper price on your new house. 

On the other side of the coin, if homeowners panic and start to place their homes on the market due to expected price decreases, they’ll drive supply up, and prices down.

Based on the unique circumstances we face today, it’s difficult to draw inferences from past recessions or try to speculate whether we’re headed for a recession at all.

So far, a decrease in economic indicators and high inflation rates are the only criteria in play for a recession. Housing is holding firm, employment levels are still rising, and the government is doing what it can to reduce inflation. 

Avoid Recession Real Estate Blues

Do you feel a little more prepared for what happens to the housing market during a recession, or do you want out right now? If you’re considering selling an unwanted home, it’s probably best to move fast.

iBuyer.com can connect you with numerous committed and qualified home investors almost instantly. These buyers focus on buying all kinds of houses and repairing them for resale or rental. 

They’re a good option if you’re selling an unwanted inherited home, need cash fast, or finalizing a divorce. The process is straightforward and clear-cut, involving just a few steps.

There’s no haggling over prices. Offers depend on up-to-date industry data and comps for your area.

Enter your home address in our home valuation tool to find out what you can get for your home today.

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