What Happens on the Housing Market if There’s Recession

Buying a house at any time can be an intimidating prospect. However, with economic uncertainties bouncing about, it’s important to stay on guard against the possibility of sudden downturns that could financially damage your investment in this life-changing purchase.

After a tumultuous start to the year, housing market analysts are confidently predicting that homeowners across America can breathe easy – there’s encouraging news that widespread property price falls and an abrupt crash of the countrywide housing market is unlikely. 

With interest rates on their way up in 2022, this sector has weathered its fair share of storms for yet another year. 

It’s a mixed bag for the real estate market. 

Demand and supply, mortgage rates, and unemployment are all contributing factors that point to an uneven picture of growth in some areas, with transactions overall on the downward trend – though fortunately not as drastic as during 2008-2009’s housing crisis.

Getting a grasp on the housing market is essential. To help you prepare, here are some insights into potential signs of an impending crash. 

Housing Bubble Possibility

A bubble in the housing market is a fascinating period of remarkable appreciation, where property prices skyrocket before eventually popping.

Despite the challenges of 2020, the housing market has seen remarkable growth over the past year. This trend is expected to continue for another 18 months before reaching its peak and leveling at a new high benchmark.

Home prices across the US have seen a consistent and significant increase since last August. In addition, Redfin data reveals an impressive year-over-year double-digit growth for each month through July 2021.

Prices Can Go Down Without Crashing

October home sales decreased dramatically compared to the same month last year. Redfin reports that nearly 30% fewer homes were sold than in October 2021, indicating an unexpected slump for what is typically one of the peak market months.

Homeowners have the advantage regarding economic uncertainty and rising interest rates, which might help prevent any potential drops in home prices from becoming catastrophic.

“The lack of transactions is actually what keeps (prices) from declining faster,” Jason Pride, chief investment officer for private wealth at Glenmede, says.

Jarred Kessler, Founder & CEO of EasyKnock, has warned that markets with accelerated home price growth in recent years are liable to experience greater dips as housing market conditions adjust and fit more closely with consistent demand.

Read also: How Will We Know If The CRE Market Is Slowing Down?

Difference in the 2008 Housing Market Dip

For many homeowners, financial uncertainty can be a stressful situation. However, if you had the misfortune of living through 2008 and 2009’s Great Recession and housing market crash, worrying about owning a home may feel especially intimidating today.

In the early 2000s, many homeowners were trapped in dire circumstances due to predatory lending practices. 

With adjustable interest rates on the rise and unemployment becoming more common, thousands of properties faced foreclosure across America, creating a devastating domino effect.

Protective regulations have been enacted in the wake of the Great Recession to ensure homeowners don’t fall prey to predatory lending practices.

Despite the challenge of rising costs, there is still a high demand among prospective buyers for housing; many are actively searching despite an undersupply of homes on the market.

Usual Effect of Economic Decline on the Housing Market

When the economy experiences two successive quarters of shrinking economic output, it signals a recession. This usually results in rising unemployment and reduced consumer spending by citizens across the board.

During economic uncertainty, recessions can create a ripple effect from unemployment to housing. Homebuyers may put their search on hold due to fears of job loss, leading to an increase in foreclosures and individuals unable to pay for their mortgages.

The housing market is a powerful economic indicator. 

While slow activity can lead to attractive mortgage interest rates and draw buyers back into the market, renewed energy in real estate also signals growth for our broader economy – something that wasn’t as evident during The Great Recession.

After a difficult start to 2022, the economy made some progress in Q3 – reported GDP increased by 2.9%. 

However, Clark Kendall, president and CEO of Kendall Capital, reminds us that for any downturn to be considered an official recession requires more than just declining figures; other economic factors must also take effect.

Conditions Leading to Housing Market Decline or Bubble

Although we don’t have any way of predicting what the future holds for the housing market, it’s reassuring to know that current conditions are not indicative of an impending crash. 

The next few months and years may bring some surprises regarding economic stability, so being diligent with the study would safeguard against uncertainty.

Homeowners, and potential homeowners, should be aware of the many factors that can affect a housing market’s stability. Here it is below. 

  • Unemployment. If too many people are struggling economically and unable to find gainful employment, it may lead to an increase in distressed home sales and foreclosures down the road.
  • Homebuilding. Building projects have faced a litany of challenges in the last ten years, culminating with a perfect storm since COVID-19 hit. From labor shortages to skyrocketing material costs and shortages, it’s been an uphill battle for builders trying to stay afloat during these turbulent times.
  • Buyer Demand. Despite a slight cooling, the demand for residential real estate remains robust in many regions — due to an ongoing shortage of available homes. Should this dynamic suddenly be reversed and buyer interest vanishes en masse, it could indicate a serious challenge ahead.
  • Homebuyer Motivation. For homebuyers searching for a new place to call their own, current market trends indicate that there are better times for investing in real estate with the expectation of sizable returns within a brief timeframe.

Read also: 3 Emerging Market Cities For CRE Growth Thanks To The Tech Industry

Photo: Montepress