A Recession Doesn’t Equal a Housing Crisis

People are speculating about a future recession everywhere you turn. Additionally, if you're thinking about buying or selling a home, you might start to doubt the wisdom of your decision in light of this. In order to allay your concerns, experts predict that if a recession does occur, it will be light and brief. As the Federal Reserve explained in their March meeting:

“. . . the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.” 

While a recession may be on the horizon, it won’t be one for the housing market record books like the crash in 2008. What we have to remember is that a recession doesn’t always lead to a housing crisis.

Let's examine historical data on what occurred in real estate during prior recessions to see if that's the case. So that you are aware of why you shouldn't be concerned about what a recession might mean for the current housing market.

A Recession Doesn’t Mean Falling Home Prices 

To show that home prices don’t fall every time there’s a recession, it helps to turn to historical data. As the graph below illustrates, looking at recessions going all the way back to 1980, home prices appreciated in four of the last six of them. So historically, when the economy slows down, it doesn’t mean home values will always fall.

The majority of individuals believe that the 2008 housing crisis, which is shown by the greater of the two red bands in the graph above, will repeat itself during the next recession. But because of different market fundamentals than in 2008, the housing market today is not about to crash. The abundance of homes for sale at the time that distressed properties flooded the market was one of the main factors that contributed to price declines. Since there aren't many houses on the market right now, home prices may slightly increase or decrease in some areas, but a crash isn't likely.

A Recession Means Falling Mortgage Rates

What a recession really means for the housing market is falling mortgage rates. As the graph below shows, historically, each time the economy slowed down, mortgage rates decreased.

Bankrate explains mortgage rates typically fall during an economic slowdown:

“During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.” 

Mortgage rates have been particularly erratic this year as a result of the rising inflation. The affordability of buying a home has been impacted by the 30-year fixed mortgage rate, which has been ranging between about 6 and 7 percent.

The days of mortgage rates falling to 3% are over, but history teaches us that they might do so if there is a recession.

Bottom Line

You don’t need to fear what a recession means for the housing market. If we do have a recession, experts say it will be mild and short, and history shows it also means mortgage rates go down.