How Will a Recession Affect the Housing Market?

  • With recession fears growing, many potential homebuyers are looking for housing prices to slow.
  • Despite the highest mortgage rates in more than a decade, homes have only risen in price this year.
  • Many believe an economic downturn will slow housing demand to the point prices will fall, while others are less optimistic.
How will a recession affect the housing market? - How Will a Recession Affect the Housing Market?

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The housing market continues to surprise economists with its stubborn resistance to contractionary monetary policy. Indeed, even as mortgage rates approach their highest level in decades, home prices seemingly only continue to soar. With further interest rate hikes on the way, which, some fear may prompt a wider economic downturn, the question on many analysts minds remains: How will a recession affect the housing market?

Housing is top of mind for many financial operators as some anticipate easing real estate prices in response to a potential recession. A recent Financial Times survey found that nearly 68% of economists expect a recession sometime next year. Perhaps rightfully so. Inflation continues to eat away at consumers’ buying power, American production is still hampered by supply-chain hiccups stemming from the war in Ukraine, and impending interest rate hikes will only further reduce the aggregate demand in the country. Heck, according to ARKK fund manager Cathie Wood, the U.S. is already in a recession.

Despite the dreary financial conditions in the country, housing prices have only climbed this year. The first quarter of 2022 saw homes increase in value more than 15% from a year prior. In April, housing saw a record high $407,000 median home price. This comes despite 30-year fixed mortgage rates approaching 6%, the highest level since 2008, up more than 2% since the start of the year.

Housing has largely maintained its price growth as a consequence of the mismatch between home demand and supply. The simple fact is that the U.S. is not building homes fast enough for would-be homebuyers. In that regard, a recession presents a major question mark for the housing market going forward.

How Will a Recession Affect the Housing Market?

The U.S. currently has a roughly two-month supply of available homes on the market, down from the historical six-month average. The Covid-19 pandemic severely slowed the rate of home construction, which was already constrained following the 2008 housing crisis. On the other hand, many economists believe there is pent-up demand for housing due to the rock-bottom interest rates enacted during quarantine. Even as rates have risen back up, many homebuyers are still interested in purchasing homes. This has put upward pressure on home prices.

Should a recession hit, we can expect an accelerated realignment of the housing market. Despite the limited supply of homes, if no one wants to buy, prices will still fall, or, at the very least, grow at a slowed rate. A recession will put upward pressure on lending rates that should dramatically reduce the demand for homes. This, by definition, should cool home prices. To what degree the housing market will ease, however, is up for debate. Some expect prices to drop in the face of a recession. Others foresee slowed price growth until home construction ramps back up.

Despite this, a recession still wouldn’t exactly create a buyers market for homes. An economic downturn implies high mortgage rates, elevated costs of goods, and reduced wage mobility. While home prices may see relief, buying a house during a recession is still, well, buying a house during a recession. The pros may simply not outweigh the cons.

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 Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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