What Happens to the Housing Market During a Recession?

by Alia Hoyt | Updated: Aug 11, 2023

Good news first: We're not technically in a recession. But sometimes it feels that way, especially where the housing market is concerned.

The housing market has been all over the place in recent years, thanks in no small part to that awful period known as the COVID-19 pandemic. Everything cost-related seemed to skyrocket during that time, including housing prices, rental rates and interest rates. For many people, however, income stayed flat, and even those few who experienced pay gains didn't really make more money, thanks to the historic inflation rates. All of this tumult has made people understandably wary of renting, buying a home or both.

What is a recession?

First, let's unpack what a recession is, anyway. In simplest terms, it's when the economy seems to go right down the toilet. Inflation, or rising costs of goods and services, is a key predictor of a recession. During a recession, it's also the norm for jobs to be harder to find, and even those people with jobs might not have as many advancement opportunities to increase their earning potential.

A decrease in consumer spending is another crucial component of any recession, and this seems to be one of the only things keeping the United States above water at this point. This might not last forever, though, as consumer spending is starting to wane, so even that silver lining could collapse at any moment.

How do recessions impact the housing market?

You've already learned that recessions jack up prices on products and such, while simultaneously making it tough to earn a living wage. The tiny bit of good news is that during an actual recession, the Federal Reserve generally lowers interest rates as a way to spur the home-buying and selling market. However, we're not in a recession (yet) so interest rates are higher than they have been in recent memory, at a national average of over 7 percent as of July 2023. The average rate in 2020, for comparison, was 3.11 percent.

A recession can affect the housing market in other ways. Because fewer people can afford to buy a home, there aren't as many buyers to compete with. As a result, bidding wars (the norm in 2020 and 2021) are far less common. This usually causes prices to go down because there's not as much demand, helping out people in the market to buy a home.

There are a couple of negative side effects, however. First, when housing prices are low, owners are less motivated to sell. Because of that, there's usually lower inventory than in a hot market. Lending organizations also make it tougher to get a loan during recessions, lending only to people who are a super safe bet in terms of being able to make payments.

How housing was affected by The Great Recession

From the 1990s up until 2007, home prices increased steadily. That swiftly ended, however, when the housing bubble “burst," thanks to The Great Recession (2007 to 2011), which was anything but great. You see, up until that point, loans were passed out like candy, meaning that anyone could get one, regardless of their financial stability. These people are known as “risky borrowers," and often had poor credit history, dubious employment and lots of other red flags.

Even people who were previously financially secure suffered through unemployment issues, thanks to a lackluster economy. So home prices rose, a lot of adjustable-rate “subprime" mortgages ballooned and as a result, people couldn't pay their bills and defaulted on their loans en masse. Eventually, the federal government intervened to help struggling banks and as the economy slowly got back on track people were able to scoop up homes for bottom-of-the-barrel prices.

During The Great Recession, renters couldn't catch a break either. Rents went up because people who defaulted on their housing loans had to start renting, leading to increased demand for the same supply (building new units pretty much halted). Paying these higher rates thus resulted in a lot of renters being unable to save for a down payment on a home, delaying their entry into the homeownership market.

Things for wannabe renters and buyers to consider

As the country teeters on the edge of a possible recession, there are some financial matters that are smart to keep in mind for people looking to buy or rent. The general rule of thumb is that a person's rent shouldn't be more than 30 percent of their income. While that's a good ideal percentage to eyeball, it also doesn't take into account things like whether you have a car payment, if you live in a very expensive housing market, etc. To that end, a rent calculator might be the best way to figure out what you can afford.

People interested in buying a home might be dissuaded by the high prices and interest rates; however, housing prices are starting to decline in many markets, plus you can refinance once interest rates (hopefully) go lower. In the meantime, it's always a good thing to build equity in a property, rather than handing it over to a landlord. So, if you have enough saved up for a down payment, it's worth talking to a realtor and a loan officer about your options.

Whatever happens, this too shall pass

Whether or not we end up in a full-blown recession or manage to skate by it unscathed, do your best to make smart financial decisions to prevent major problems. Times might not be ideal right now, but generally, they do manage to get better. Just ask anyone who owned property during The Great Recession.

Categories: Landlords, Renters

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