What Past Recessions Tell Us About the Housing Market

As Greg McBride, Chief Financial Analyst at Bankrate, says:

“Two-in-three economists are forecasting a recession in 2023 . . .”

With the spectre of a recession looming on the horizon, it's natural to wonder what impact it might have on the housing market. But history has shown us that there's no need to fear. By examining the data from past recessions, we can see how the real estate market has weathered economic turmoil. This historical perspective can put your mind at ease and give you a better understanding of what to expect in the event of a recession 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 back to 1980, home prices appreciated in four of the last six. So historically, it doesn't mean home values will always fall when the economy slows down.

When the topic of a potential recession arises, many people immediately think back to the housing crisis of 2008. It's easy to assume that history will repeat itself and that the housing market is once again on the brink of collapse. However, this is different. The market fundamentals of today are vastly different from those in 2008, and experts predict that a recession is unlikely to have the same devastating effect on the housing market.

While home prices may fluctuate in different local markets, experts predict that prices will remain relatively stable nationwide and not fall as they did in 2008. The average of their 2023 forecasts shows that prices will net neutral. This means that a recession will not likely cause a crash in the housing market as it did in 2008.

A RECESSION MEANS FALLING MORTGAGE RATES

Research also helps paint the picture of how a recession could impact the cost of financing a home. As the graph below shows, historically, mortgage rates decreased each time the economy slowed down.

Fortune explains mortgage rates typically fall during an economic slowdown:

“Over the past five recessions, mortgage rates have fallen an average of 1.8 percentage points from the peak seen during the recession to the trough. And in many cases, they continued to fall after the fact as it takes some time to turn things around even when the recession is technically over.”

As we move into 2023, market experts predict that mortgage rates will likely stabilize at lower levels than last year. This is because mortgage rates tend to be closely tied to inflation. And early indicators suggest that inflation is beginning to cool off. Should this trend continue, rates may even drop a bit further. However, it's unlikely that we'll see rates as low as 3% again.

It's important to remember that there's no need to be fearful regarding the housing market and a potential recession. While a recession may occur, it's likely to be mild, and the housing market will play a vital role in a quick economic rebound. Overall, you can expect a stable market and home prices to be net neutral in the coming years. As the 2022 CEO Outlook from KPMG, says:

“Global CEOs see a ‘mild and short’ recession, yet optimistic about global economy over 3-year horizon . . .

 More than 8 out of 10 anticipate a recession over the next 12 months, with more than half expecting it to be mild and short.”

Bottom Line 

Though past events don't always dictate future outcomes, studying history can still  help us gain valuable insights. Looking at historical data, home values have generally appreciated during most recessions, and mortgage rates have dropped.

The housing market is a complex and ever-changing landscape, and if you're considering a purchase or sale this year, expert advice is essential. Need help navigating this rough terrain - connect with me to arm yourself with the knowledge you need to make the most of your homeownership goals in these uncertain times.