The average person believes a recession is unavoidable at this point — and many economists agree. A July 2022 poll of financial experts revealed that nearly half of the country’s leading economists expect to see a recession within the next 12 months.
As Andrew Shader shares, a recession would have a significant impact on real estate markets throughout the nation.
Why Are Home Prices Currently Rising?
There are currently fewer homes on the market than buyers looking for residential real estate. This creates strong demand, helping to raise home prices. As long as the demand remains high, buyers and sellers can benefit from rising property values across the nation.
However, this situation depends on maintaining a limited number of available homes while more buyers enter the market.
How Will a Recession Impact Home Prices?
Several factors affect the housing market during a recession. Since a recession usually brings business closings and layoffs, more people will be looking for work, including homeowners who sell their homes and relocate for new jobs. At the same time, fewer potential buyers feel financially secure enough to take on a new mortgage.
These factors could lead to an influx of homes, creating a greater supply and reducing demand.
Normally, the Federal Reserve will drop rates during a recession, but that doesn’t seem to be the case yet. If rates continue to rise, homebuyers may find the prospect of buying unaffordable. However, savvier buyers might be waiting to buy until the market changes course. This could counteract the higher inventory of homes and help stabilize prices.
When Will Home Prices Drop?
Some markets will see a drop in home prices during a recession, especially markets where prices are currently overinflated. In those markets, prices will likely decline to previous levels. While sellers will still come out ahead financially, more buyers will be able to afford new homes.
Will There Be Another Housing Bubble Burst?
Many people worry that another recession will cause the housing market to burst, as it did during the Great Recession. But that is unlikely.
Prior to that economic downturn, lenders were more lenient with buyers, allowing people to buy homes they couldn’t afford even in the best of times. When the Great Recession hit, those buyers faced layoffs, higher prices, and unmanageable mortgage payments.
The housing market changed after the bubble burst as lenders became stricter with borrowing requirements. This helped ensure buyers could afford to pay their mortgages. For this reason, fewer houses will go into foreclosure, and the market is less likely to crash.
What Role Will the Construction Industry Play?
Finally, there’s the issue of fewer new homes entering the market. Due to labor shortages and supply chain issues, the construction industry is not building as many new homes as the market can support.
If there is a recession, some of these problems could resolve naturally. More people will be looking for work, which could eliminate labor shortages. In that case, we’ll see a cooling-off period for the market.
About Andrew Shader
Andrew Shader is an entrepreneur with a passion for real estate investing. He has built a career on identifying properties with the potential for growth and using his expertise to improve the value of each property he handles. His experience has given him a thorough understanding of the real estate market and the economic trends that affect it.