A recession can impact the housing market in several ways. Typically, buyer demand weakens due to economic uncertainty, potentially leading to price drops or mortgage rates typically drop. However, the current situation is unique, with already high interest rates and low housing inventory. While mortgage rates might not fall significantly, some price softening could occur. Ultimately, the recession's impact depends on various factors, making local market analysis crucial for informed decisions.
Also read: How Much Closing Costs for Buyers in Florida
Key Takeaways
Also read: How Much Cost to Build a House in Georgia
What is a Recession?
A recession refers to a contraction in economic activity that lasts for at least a few months. The most common definition is two consecutive quarters of declining gross domestic product (GDP).
Other indicators like rising unemployment and declines in retail sales and industrial production can also signal or contribute to recessions.
Historic Housing Recessions in the U.S.
The United States has experienced several housing recessions throughout its history, often coinciding with broader economic downturns. While not every recession leads to a housing market decline, some notable examples stand out for their severity and impact:
It's important to remember that not all recessions lead to housing market declines. In fact, four out of the last six recessions in the U.S. witnessed home price appreciation. This highlights the complex interplay of various factors influencing housing market trends.
Are We in a Recession Now?
As of 2024, the United States is not officially in a recession. This determination is made by the National Bureau of Economic Research (NBER), which uses a broader definition than simply two consecutive quarters of negative GDP growth.
Here's a breakdown of the current situation:
Therefore, while there have been concerns about a potential recession, the official verdict is no. It's important to stay informed by following economic news and analyses from reputable sources for the latest updates.
How Recessions Impact Homebuying Demand
Recessions can significantly impact homebuying demand, primarily through several key factors:
1. Decreased Affordability
2. Reduced Confidence
3. Tighter Lending Standards
Combined Impact:
These factors can lead to a decrease in buyer demand, which can have several consequences:
It's important to remember that the impact of recessions on the housing market can vary depending on the severity and duration of the economic downturn, as well as local market dynamics. While recessions generally dampen demand, some segments of the market may be less affected, and opportunities may arise for buyers who are prepared and financially secure.
Pros & Cons of Investing in Housing During a Recession
For Buyers
Pros:
Cons:
For Sellers
Pros:
Cons:
For Investors
Pros:
Cons:
Carefully weigh the pros and cons before buying, selling, or investing during times of economic contraction. Markets vary greatly, so understand conditions in your specific area.
Do House Prices Go Down in a Recession?
Yes, home prices often decline during recessionary periods, but not universally across all housing markets. Broad national price indexes fell around 30% peak to trough during the Great Recession. However, some metro areas saw less drastic drops while others completely crashed.
Whether or not prices fall depends on the balance of supply and demand in a given market. Buyer demand drops substantially during recessions for the reasons already outlined. At the same time, the number of distressed sales (foreclosures and short sales) typically rises, increasing the proportion of discounted listings.
If supply outpaces demand, sellers must lower prices to attract buyers. Price drops encourage even more sellers to list their homes preemptively before values fall further. This kicks off a vicious cycle further driving down prices.
However, markets with more resilient economies and consistent housing demand can avoid major price corrections. Areas with steady population growth, restricted homebuilding, and desirable amenities have a better chance of emerging relatively unscathed.
Where Home Prices Could Drop
Predicting exactly where home prices will drop is difficult due to the complex interplay of various factors at the national and local levels. However, some areas may be more susceptible to price declines during economic downturns or periods of slower growth compared to others. Here are some general indicators to consider:
Factors that could indicate potential price drops:
It's important to remember that these are just general indicators, and individual market dynamics can vary considerably. Conducting your own research and consulting with local real estate professionals is crucial for gaining a more accurate understanding of the specific risks and potential for price declines in your target area.
Here are some resources that can be helpful in your research:
By combining this information with your personal risk tolerance and investment goals, you can make informed decisions about potential real estate purchases during economic downturns.
Should You Buy a House During a Recession?
In general, it’s better to wait to buy if possible. Even if you get a good price, it may keep dropping, leaving you immediately underwater on your mortgage. And if you lose your source of income, making payments gets difficult quickly.
However, some resilient buyers can take advantage of recession conditions:
Always account for your personal financial situation, risk tolerance, and outlook for the local economy before buying into a housing downturn. Time the bottom right, and you might secure an ideal home for years to come. Mistime it, and you’ll regret overpaying if values continue dropping.
Should You Sell Your House During a Recession?
Like buying, the decision to sell during an economic slump depends greatly on your situation, equity position, future plans, and market dynamics.
Remember, housing markets vary by location and price segment. Work with a trusted real estate agent to decide if selling now or later makes sense in your specific circ*mstances.
How to Invest if You’re Saving for a Home
Recommended next reads
Investing while saving for a home:
If The Housing Market Crashes What Happens to Interest Rates
If the housing market crashes, interest rates are likely to go up. Higher interest rates reduce demand for housing because the cost of homeownership increases - homes become less affordable. With fewer home buyers able to obtain financing due to higher rates, demand declines. The drop in demand then leads to decreasing home prices. So in a housing downturn, buyers face the dual obstacles of high interest rates and falling home values.
Is It Better to Have Cash or Property In a Recession?
There's no one-size-fits-all answer, as both cash and property have advantages during a recession:
Ultimately, the best option depends on your individual circ*mstances, risk tolerance, and financial goals. Consider seeking professional advice for personalized guidance.
What Happens to Mortgages During a Recession
During a recession, mortgages can be impacted in several ways:
It's important to remember that these are general trends, and the specific impacts of a recession on mortgages can vary depending on the severity and duration of the economic downturn, as well as local market conditions.
Conclusion
Economic downturns and recessions invariably cause declines in housing market strength. Reduced demand from buyers, sellers, investors, and tenants spreads pains across most real estate segments.
While home values often correct lower in recessionary periods, markets don’t all behave uniformly. And some potential buyers stand to benefit from decreased competition and faster deals. During these complex times, rely on trusted professionals to help determine your best personal course of action.
Stay tuned to economic trends, tailor your financial plan accordingly, and you’ll be well-positioned to reaction nimbly as conditions dictate. With prudent planning, savvy players can not only weather recessionary storms in the housing market - but actually thrive because of them.
How Long Did It Take for House Prices to Recover After 2008
While the national picture provides a general idea, it's important to remember that housing market recoveries can vary significantly by location. Here's a breakdown of the national recovery timeline after the 2008 housing crisis:
Timeline:
Frequently Asked Questions (FAQ)
Do home prices always fall in a recession?
No, home prices do not always decline nationally during recessions. Much depends on the depth of the downturn and how low mortgage rates offset economic weakness. Supply shortages may also prevent declines.
Should I buy a house during a recession?
Buying a home during a recession can make sense if you find attractive opportunities and can shoulder the risk. But delaying offers more certainty once demand rebounds. Consider your personal factors and risk tolerance.
When is the best time to sell a house in a recession?
Most experts say avoiding a recession is best if possible when selling. Demand typically drops while home sit longer on the market. But economic necessity still forces many sales.
How long do housing recessions last?
There’s no fixed duration for housing recessions tied to economic downturns. But depressed activity, reduced prices and stalled construction often persists for 1-2 years on average.
What markets face the biggest price risks in a recession?
Overvalued and investor-heavy markets often correct more substantially. So do areas relying on tech, finance and struggling industries. But all markets see impacts from shrinking demand during downturns.