The term “recession” might seem scary but it’s not as bad as one would think. Many might assume a recession directly affects the real estate market, but that’s not always the case. Most of us have experienced a recession in our lifetime and have seen the way it affects the economy and the world around us, but this does not mean the real estate market will crash.
Our last experience with this type of downturn was the Great Recession of 2008. Although we have not seen a recession since then, recessions are normal in any functioning economy. There is speculation that we are due for another recession in the upcoming months, which is why it is important to know how recessions impact the market.
WHAT DETERMINES A RECESSION
Before diving into how a recession would affect the real estate market, It’s important to understand the basics of a recession. A recession has the stigma around it that all markets will fail and burn to the ground, but it’s not as detrimental as it might seem. A recession is simply a decline in gross domestic product . As long as there is negative GDP growth through two consecutive quarters, it would be considered a recession, whether that’s a drop of 5% or .5%. Another way to understand a recession is through a period of high unemployment and value drops. Not only can values of homes plummet during a recession, but stock values also typically drop.
HOUSING PRICES IN A RECESSION
There will always be changes to the housing market, but a recession does not equal housing price decrease. There is a large chance that home prices will actually go up during a recession, in fact, home prices have gone up in the last 3 out of 5 recessions.
Not every recession looks like the 2008 recession, “Before 2008, the previous recession occurred in 2001 (I bet we all forgot about that). In 2001, home prices went up 6.6%. Almost double historical norms. In 2008, the real estate market caused the great recession. Consider that recession more of an outlier than the standard measure for comparison or projection. In fact, most economists expect the next recession to look a lot more like 2001 than 2008,” said Michael Rice in How Will a Recession Impact The Real Estate Market.
POTENTIAL DECREASE IN HOUSING PRICES
If this isn’t the case and house prices go down, it isn’t necessarily a bad thing either. As we all know, housing prices are at a high right now, this is because there is not enough inventory to meet the astronomical demand. If a recession were to hit, and if mortgage rates stay high or continue to inflate, this will bring the demand down which could eventually bring housing prices down to a more normal level as well. “As of late March, home prices were up 15% on an annual basis, per the National Association of Realtors (NAR). That means there’s lots of room for home prices to come down without creating a crisis situation that leaves millions of homeowners underwater on their mortgages.” Maurie Backma explains in Here’s What a Recession Could Do to the Housing Market. Although this is a possibility, it’s unlikely, as inventory is still so low.
THE OPEN MARKET
Overall, there is a possibility the housing market could rise or fall, but the most likely scenario for an upcoming recession is that a recession would “open up the housing market, allowing financially secure first-time buyers to finally have a shot at owning property as well as real estate investors to scoop up income properties more affordably,” Maurie Backma offers.
TODAY VS. 2008 RECESSION
In recent surveys and research, the three most likely triggers of the next recession could be: stock market correction, trade policy or a geopolitical crisis. It is unlikely the housing market would cause a recession. In the early 2000s to 2008, it was common to qualify for a stated income loan having zero money down and any credit score (aka unqualified buyers). But that’s not the case today; lending requirements are stricter than ever. Buyers are required to put more money down and be fully qualified. This alone greatly reduces the chances of another housing crash. Appreciation might slow down, but it’s not likely for home values to depreciate.
WHAT YOU NEED TO KNOW
The truth is, recessions are in our future and a cyclical part of a healthy economy. There have been 47 recession in the U.S., and in many of them, there was simultaneous economic growth in various industries. A recession shouldn’t scare you away from the housing market. Even if you bought a home in 2007, that home has fully recovered its value and would look like a great investment. Instead, you can focus on other aspects for financial security like healthy income to debt ratio, steady income potential and the ability to hold onto the home for an extended time period to fully realize the investment.
TRUST THE EXPERTS
We pride ourselves on striving to be the most knowledgeable real estate professionals in the Columbia Gorge. We are happy to help answer any questions you might have and help evaluate your concerns. We offer amazing agents who will be there with you from start to finish. We will help you make the best decisions throughout the buying process whatever the state of the market and will do our best to make sure any doubts you might have had turn into a realistic possibility of owning a home.