With recessionary fears bubbling over after the S&P 500 logged a more than 11% loss over just two weeks, home prices are in focus. The housing market has been red-hot even amid rising mortgage rates and falling demand. Supply constraints, inflation and rapidly constricting monetary policy has some analysts betting on a wider economic pullback. So, what happens to home prices during a recession?
Well, historically, they fall. The reduced demand for homes resulting from an economic downturn typically lowers housing prices. This was certainly the case in 2008, as the housing bubble burst and led the way for a global recession. In many ways, however, the parallels between a modern recession and the Great Recession end there.
The housing market of today is not the housing market of 2006-2007. In that time, homes were grossly oversold due to artificially low interest rates and unethical lending practices. Mortgage brokers are held to far more stringent lending laws today. As a result, homeowners aren’t at as much of a risk of defaulting on their loans. Most importantly perhaps, home values aren’t grossly inflated due to artificially high demand.
In 2022, home prices have held strong largely due to the mismatch between supply and demand in the housing market. The inventory of housing is notably low. At the end of March, the U.S. only held a two-month supply of available homes for sale. This is markedly below the average five-month inventory typical of more balanced housing markets. Even as mortgage applications continue to drop more than 50% from last year, housing prices have remained steady on limited supply.
What Happens to Home Prices During a Recession?
While real estate’s organic pricing strength means it’s unlikely to crash, this also means it’s more resistant to the downward pricing pressure a recession would otherwise cause.
An economic downturn should theoretically make home prices cheaper. However, the drastically undersold real estate market of today means home prices are somewhat immune to contractionary forces. This is apparent today, even before a major economic crash.
Even as mortgage rates climbed 4% from January to March, housing prices largely continued to rise this year. From Q1 2021 to Q1 2022 the average home cost in the U.S. jumped 21%. Mortgage rates trend near their highest level since 2008. With mortgage rates likely only to continue soaring in response to the Federal Reserve’s onslaught of interest rate hikes, housing will eventually feel the effects of an unkind seller’s market. Whether it ends up easing home prices, or slowing its current acceleration, remains to be seen.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.