The Recession and the Housing Market
Here's what you should know
For the past ten years, the housing market has grown exponentially, and the median home price has increased since March of this year. At the beginning of the month, new information about the market and homebuilders had concluded that the housing cycle had turned over and moved into a housing recession.
The inflation we are experiencing today has triggered aggressive actions from the Federal Reserve, with economists predicting we are headed towards a recession. These issues come at a time when home prices are at an all-time high, along with mortgage rates rising. Causing many shoppers to question buying a home and waiting for a potential price drop caused by a recession.
These potential reactions could have an immense impact on everything we do, especially in the housing market. The U.S has about a two-month supply of available homes on the market, compared to the six-month average. We also face the considerable impact the pandemic has had on home construction and renovations, on top of rebuilding the market from the 2008 housing crisis.
Many economists believe this is a demand for housing due to low-interest rates during quarantine. However, as rates increase, many buyers are still interested in being homeowners. Because of this, there has been more pressure on home prices.
An accelerated realignment in the housing market is expected if a recession hits. Even though we have a limited supply of homes for sale, if no one wants to buy, prices will continue to fall and grow slowly.
A recession will result in upward pressure on lending rates that would drastically decrease the demand for a home, ending up with "cool” home prices.
How a Recession Affects Real Estate
A recession won't exactly create a buyers market for homes. It would mean high mortgage rates, higher costs of goods and services, and reduced wages. While home prices may seem low, buying a house during a recession can still seem risky.
The entire economy can feel the pressure a recession has. Stock markets, employment, and real estate all will feel the pressure. While the housing market can fall during a recession, it doesnt necessarily guarantee it will.
Falling prices are less likely than you might think. Home prices often remain steady or continue to rise. High mortgage rates can make buyers wary of buying. But recessions in the 80s and 90s showed mortgage rates were as high as 18%, which doesnt mean a demand or prices will stagger. The impact on affordability and demand will determine how the market is affected.
Today's median income is around 30% of the median home price. In 1980, that median was almost 45%. The lower the income percentage relates to housing cost, the less affordable housing becomes.
Market Deceleration
Wage growth can't keep up with inflation, but when there's an additional 20% price growth every year and rental growth, it makes sense that we can't afford prices with higher mortgage rates. This shows that we are headed to a demand cooldown that would put housing costs at a more affordable rate.
Even though more homes are on the market, closed sales have dropped. There has been an increase in the number of price reductions, which is a sign that high pricing and multiple offers may pass. However, a recession could also increase the rate at which things would cool.
A Cool Down
A recession is often the result of high unemployment rates, which cause people to put their homes on the market and relocate for new job opportunities. This could also result in high foreclosure rates adding to the inventory levels. High inventory in a cooling demand means prices will likely go back down. It's unlikely we'll see a drop in values like we did in 2008.
Markets that are overpriced for the median household income will more likely see prices slump for an extended period. Others could see a demand and price growth will continue to rise at slower rates. Relief could be one-way investors or buyers are waiting for prices to cool before buying, whether a recession comes or not. Homeowners worried about the decreased value of their properties should continue to think about things long-term. Despite drops, the past has shown us home values can rebound and exceed previous highs.