Why a Recession Won't Necessarily Lead to a Housing Crisis: Lessons from History

Everywhere you look, people are talking about a potential recession. And if you’re planning to buy or sell a house, this may leave you wondering if your plans are still a wise move.

To help ease your mind, experts are saying that if we do officially enter a recession, it’ll be mild and short. 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.

To prove it, let’s look at the historical data of what happened in real estate during previous recessions. That way you know why you shouldn’t be afraid of what a recession could mean for the housing market today.

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.

Most people remember the housing crisis in 2008 (the larger of the two red bars in the graph above) and think another recession will be a repeat of what happened to housing then. But today’s housing market isn’t about to crash because the fundamentals of the market are different than they were in 2008. Back then, one of the big reasons why prices fell was because there was a surplus of homes for sale at the same time distressed properties flooded the market. Today, the number of homes for sale is low, so while home prices may see slight declines in some areas and slight gains in others, a crash simply isn’t in the cards.

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.”

This year, mortgage rates have been quite volatile as they’ve responded to high inflation. The 30-year fixed mortgage rate has hovered between roughly 6-7%, and that’s impacted affordability for many potential homebuyers.

But, if there is a recession, history tells us mortgage rates may fall below that threshold, even though the days of 3% are behind us.

What Should Homebuyers and Sellers Do in a Recession?

So, if a recession is on the horizon, what should you do if you’re planning to buy or sell a home?

If you’re looking to buy, falling mortgage rates may mean now is a good time to lock in a low rate. And because the housing market isn’t likely to crash, you can still find great deals on homes if you’re willing to shop around and be patient.

For sellers, it may be a little trickier. Depending on where you live, home values may see slight declines during a recession. But, because there are fewer homes for sale today, your home may still be in high demand. Just be prepared to price your home competitively and be patient with the process.

The Bottom Line

It’s important to keep in mind that while a recession may not be an ideal situation for the economy, it can create opportunities for those looking to buy a home or invest in real estate. During a recession, there may be more motivated sellers looking to get out from under their mortgage or other debts. This can provide buyers with more negotiating power and potentially lead to a better deal on a property. Additionally, low mortgage rates can make it easier for buyers to secure financing and invest in a property that will increase in value as the economy recovers.

At MortgageToday LLC, we understand the concerns that many people have about the housing market and the economy as a whole. That’s why we’re dedicated to providing our clients with the information and guidance they need to make informed decisions about their finances and their future. Whether you’re a first-time homebuyer, an experienced investor, or somewhere in between, we’re here to help you achieve your goals and build a secure financial future.

If you have any questions about buying a home or investing in real estate, or if you’d like to learn more about our services, please don’t hesitate to contact us. We’re always happy to help and look forward to hearing from you!