Is a Recession About to Rock the Housing Market?

Is a Recession About to Rock the Housing Market?

The signs are clear and causing alarm: The U.S. may be on the verge of entering a recession.

Even with low unemployment and a tight labor market, persistent inflation, slowing growth, and rising interest rates have many economists, investors, and policymakers girding for a sustained economic downturn.

If a recession hits, will the housing market tank? After all, in the past two years the housing market has gone gangbusters, with supercharged sales prices and record-low inventory. A correction in the market could be overdue.

Learn why some experts think a recession would upend the housing market, and others believe the factors driving high prices and low inventory will persist – regardless of whether the economy is growing or not.

Yes, a Recession Would Upend the Housing Market    

The health of the housing market is, in general, determined by whether enough people want to buy and can pay for a home.

Practicing social distancing and working remotely during the height of the COVID-19 pandemic caused many middle-class buyers to realize they wanted to own a home or upgrade to a larger property. Contributing to this surge in demand was the Federal Reserve’s decision to slash interest rates, resulting in record-low mortgage rates – a huge incentive for buyers to get in the market.

Buyers currently face a considerably different situation:

  • COVID restrictions have largely been lifted, and many white-collar Americans are back in the office and the rhythms of normal life.
  • The Fed is raising interest rates to curb the most serious, sustained inflation of the past 40 years.
  • Mortgage rates are surging, making it harder for buyers to qualify for a home loan.

Taken together, it’s not unreasonable to think that a recession – during which people usually lose jobs and income – would not simply cool but torpedo the housing market.

Already, there are indications that rising mortgage rates are locking consumers out of the market. Buyers of newly built homes have reported that skyrocketing mortgage rates caused them to back out of a deal. And even before the economy started to wobble, some buyers this year were entering the market because they expected mortgage rates to be prohibitive in the coming months and years.

No, the Housing Market Won’t Implode in a Recession

For all the gloomy economic predictions, the housing market is and may remain somewhat protected by a simple, powerful reality: There are far more people who want to buy homes than available properties on the market.

The home shortage is attributable to three factors:

  1. Home building remained atypically low in the years after the late 2000s subprime mortgage meltdown.
  2. Record-low mortgage rates and marked changes in day-to-day life in 2020 and 2021 released unprecedented and insatiable buyer demand for homes.
  3. Supply chain snags wrought by the pandemic and soaring prices for raw materials such as lumber have made it costly and difficult to build new homes.

All told, the causes of the home shortage – namely, that it’s hard to build new homes – won’t change even if the economy slows down. And while nobody’s cheering for what could become a combination of economic recession and rampant inflation, real estate has traditionally been a safe harbor when currency becomes less valuable.

In addition to low supply, there are demand-side realities that could shelter the real estate market from the worst of an economic recession.

Among the biggest contributors to inflation has been increasing salaries – indicating that plenty of buyers still have the means to put money down on homes, even as interest rates rise and the cost of borrowing for a home loan increases. And the pool of eager potential buyers is unlikely to dry up soon: millennials, the U.S.’s largest generation, are in or about to enter prime home buying age.

Finally, the housing market is at reduced risk of capsizing during a recession because homeowners can pay their mortgages. In the late 2000s, delinquency rates on mortgages surged, because checks on income verification were weak and the “teaser” periods on adjustable-rate mortgages (ARMs) slotted people into home loans they couldn’t afford. Today, income verification is much stronger, and ARMs and mortgage discount points are more tightly regulated.