What Happens to Home Prices During a Recession and Why You Shouldn’t Panic

WWH
May 2
3 min read

With talk about the economy flooding the news, many wonder how a potential recession will impact their home’s value and buying power. It can be overwhelming, but let’s not forget: knowledge is power.

In this blog post, we’ll look at how past recessions have influenced the housing market and why there’s no need to panic, even if the headlines seem bleak.

A Recession Doesn’t Mean Home Prices Will Fall

Many people think that a recession automatically leads to falling home prices, similar to the severe drop during the 2008 financial crisis. However, the 2008 downturn was an extreme scenario, and historical data shows that this is not the norm.

According to research from Cotality (formerly CoreLogic), home prices actually rose during four of the last six recessions. For example, during the dot-com collapse in the early 2000s, home values increased by about 6%. This underscores the unique nature of the 2008 crash.

Furthermore, despite some fluctuations in housing availability, the current market has low inventory levels. This lack of homes for sale often sustains competition among buyers, which can stabilize or even increase prices during economic uncertainty. In fact, many cities are experiencing price increases of about 3% to 5% per year due to limited supply.

Mortgage Rates Typically Decline During Recessions

While home prices may be stable, mortgage rates often drop during recessions. Historical trends show that during the last six recessions, mortgage rates typically decreased, providing some relief for homebuyers.

For instance, during the Great Recession, the average mortgage rate fell from about 6% in 2007 to around 4% by 2010. While we may not see those very low rates again, any reduction can enhance borrowing power for buyers looking to make a purchase or refinance.

It’s crucial to manage expectations, though. Although rates are predicted to decline, we may not reach the ultra-low 3% levels seen a few years back. Still, a drop from current rates could make a significant difference in monthly payments.

What This Means for Potential Homeowners

If you’re thinking of buying a home in these uncertain times, it's natural to be anxious. However, focusing on the fundamentals can provide reassurance.

Low inventory indicates that home prices could hold steady, even during a recession. For those entering the market, falling mortgage rates can work in your favor, as they may keep your purchasing power intact or provide you with a better selection. For instance, if home prices increase by 4% but mortgage rates drop to 4%, your overall costs could remain manageable.

If you're already a homeowner, a recession might present an opportunity to refinance at a more favorable rate. This move can lead to substantial savings over time, especially if you can lower your monthly payment.

The Role of Local Markets

Remember, real estate is not one-size-fits-all. The national picture can obscure local realities, where economic conditions vary significantly. Factors such as job growth, population influx, and housing supply can greatly influence local home prices.

In regions with strong employment opportunities, for example, home prices may continue to rise even during troubled economic times. Meanwhile, areas facing job loss or declining populations may see price stabilization or drops. Researching local market conditions and consulting with real estate professionals who know the area can provide valuable insights that traditional statistics may overlook.

The Psychological Aspect of Recession Fears

Widespread media coverage can exacerbate panic among potential buyers and sellers. It is essential to approach the situation with rationality rather than succumbing to impulsive reactions.

Sometimes, recession fears lead to decreased consumer confidence. This caution can be detrimental to the housing market. It’s important to remember that while the economy might face challenges, the housing market often behaves differently than it did during previous downturns.

Many of these fluctuations are normal in economic cycles and should not dictate hasty decisions. Instead, focusing on long-term financial health and stable housing needs will serve you better.

Staying Grounded in Uncertain Times

While a recession might raise questions about home prices, history tells us that significant downturns are far from guaranteed. Instead, recessions may even provide opportunities for buyers, especially with potential drops in mortgage rates.

As we face unpredictable economic times, keep in mind that the housing market operates under different dynamics. Staying informed and composed can help you make the right choices that align with your financial goals, no matter what the news reports say.

So, when the news seems daunting, take a deep breath. The housing market has its own rhythm, and it may surprise you with its ability to recover.