The housing market has experienced over 10 years of exceptional growth, where the median home price jumped an incredible 117% as of March 2022. This rate of growth has only been outpaced by the home price growth in the decade before the Great Recession of 2007 to 2009, where home values rose 121%.
Home prices continue to surpass recent highs. Despite signs of slowing demand thanks to rising mortgage rates, it seems nothing is stopping this red-hot market from soaring. But a recession might.
Now that several experts are heeding warnings over a potential recession, here's how it could impact the housing market.
Recessions and real estate
The impacts of recessions can be felt across the entire economy, everywhere from employment to spending to stock market movement, and even real estate. While the stock market and the housing market can fall during a recession, it isn't guaranteed to happen.
In fact, falling prices are less common than you may think. Home prices have remained steady or risen during the last five recessions, aside from the Great Recession and the recession of 1990.
High mortgage rates can deter people from buying, but as the recessions of the '80s and '90s showed us, when mortgage rates were as high as 18%, high rates doesn't mean demand or prices will falter. What really determines how the real estate market is affected is the impact on demand and affordability.
Today's median income is around 30% of the median home price. In 1980, that number was almost 45%. The lower the percentage of income as it relates to the cost of housing, the less affordable housing is.
Why a decelerating market is likely
Wage growth already isn't keeping pace with inflation, but when you add in 20% home price growth year over year and double-digit rental growth, it's understandable to see why people simply can't afford today's prices with higher mortgage rates.
The trend is already showing we're heading toward a cooldown in demand, which should put housing costs back to more affordable levels. February through May 2022 has already shown signs of a decelerating market, even earning the title of the Great Housing Market Deceleration.
There are more homes coming on the market, yet the number of closed sales has dipped. There has also been an increase in the number of price reductions, a sign that top-dollar pricing and multiple offers may soon be in the past. However, a recession could increase the rate at which things cool.
Why a recession could quickly cool the market this time
The Federal Reserve usually lowers interest rates during a recession to help make the cost of borrowing more affordable and spur more economic activity, particularly within the housing market. But that's not an option today, considering the Fed's move to aggressively raise rates to combat skyrocketing inflation after the COVID-19-related recession. The continued increase in energy, gas, and food costs will weigh on consumers, likely making housing even less affordable.
A recession, which is usually marked by high unemployment, could cause people to list their homes as they relocate for new jobs. It could also lead to higher rates of foreclosures, which adds to inventory levels. More inventory at a time of already cooling demand means prices will likely come down. But it's unlikely we'll see a massive drop in values like we did during the Great Recession.
Rather, certain markets that are overpriced for the median income of the area are more likely to see prices slump for a while; others may see demand and price growth continue, just at slower rates.
Relief could be on the way for investors or buyers who are waiting for prices to cool before buying, regardless of whether a recession comes. Homeowners who are worried about losing value in their homes should continue to think long term. Despite drops in the past, home values have always rebounded -- and many times far exceeded previous highs.
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