Recession and Its Impact on the Housing Market

Sep 14, 2022

6

min read

T

he fear of recession is mounting in the USA. Many Americans see the recession as a monstrous threat, ruining their quality of life. The Great Recession of 2008 was the worst-hitting recession in recent history, resulting in massive job losses, a surge in mortgage defaults, and the draining of savings. Many people still feel the effects of the recession and are not prepared for another one.

However, recessions are an inevitable part of the economy's cycle, and it seems the United States is now heading for another recession. While some believe the U.S. is already in recession, others think the recession will soon hit it. Either way, a recession is inevitable in the United States, and so is its impact.

Like every other part of the economy, the housing market will feel the effects of the recession. The previous recession caused a crash in the housing market and left many homeowners underwater, triggering panic among homebuyers. The most asked question now is, will there be another crash in the housing market? How does recession impact the housing market? In this article, we will share our thoughts.

What Is a Recession?

Firstly, it's essential to understand what a recession is. A recession is defined as two consecutive quarters of GDP decrease, followed by a rise in the unemployment rate, a fall in income, and a reduction in total household spending.

Sad Character Losing Money — Source: pikisuperstar (Freepik.com)

Recessions generally occur when there is a widespread drop in spending. A financial crisis, a trade disruption, an adverse supply shock, the bursting of an economic bubble, or a large-scale human or natural disaster might all set off this cycle of events.

Is the USA in a Recession?

The Covid 19 recession was the shortest in the history of the USA. The pandemic-led slowdown was followed by the exponential growth of the U.S. economy. It grew to 5.7%, the strongest since 1984. But the increase was the effect of the pandemic, and the actual color of the U.S. economy showed in 2022.

The U.S. economy contracted by 1.6% in the first quarter of F.Y. 22-23. Since the contraction, people believed the economy was heading into a recession. But, the forecast became more evident after the economy contracted by 0.9% in the second quarter. Under traditional standards, the U.S. economy is already in a recession, but the government has yet to declare since the employment market remains strong.

Usually, recessions are characterized by high unemployment rates, layoffs, and low income. But, this time, this is not the case. In fact, the unemployment rate is at an all-time low. There are vast numbers of unfulfilled jobs and a labor force shortage. Most believe the labor shortage is due to many baby boomers retiring. As a result, many companies are having a hard time getting workers.

Income is Down — Source: pikisuperstar (Freepik)

Another characteristic of a recession is low consumer spending which is already visible due to the decade-high inflation. The increase in gas and food prices has decreased the purchasing power of consumers, thus decreasing overall household consumption. While all the factors hint that the U.S. is already in recession, the robust labor market has what kept the U.S. economy afloat. But, economists believe that with the downturn around the corner, the demand for labor would decrease officially, leading the USA to an official recession.

If the USA enters a recession, the experts predict high chances of a stock market crash, housing market crash, high unemployment rate, rise in homelessness population and poverty, high government borrowing, and low economic output.

The Historical Impact of the Recession on the Housing Market

The Great Recession of 2008

The great recession of 2008 was worst hitting recession that lasted for 1.5 years. The subprime mortgage crisis led to the housing market crash and the global financial crisis. In short, due to the high demand for housing, the banks were offering mortgages to high-risk borrowers with low income and credit scores. Mortgage lending increased, and so did the housing market demand, causing the housing market bubble.

But, the people could not keep up with the ballooning expensive mortgage payments and started to default. As a result, the houses were auctioned, and many were put back on the market for sale. But, there weren't buyers. Since the supply was high and demand was low, the rising home prices started collapsing. With the drop in house prices, homeowners lost their equity value and were indebted to the loan they could not pay. This led financial institutions to file for bankruptcy, causing the global economic crisis.

The 2020 Recession

While the 2008 recession saw the housing market crash, the 2020 recession was much different. The recession was the shortest in the USA's history, lasting only two months. It was driven by the Covid-19 pandemic, which jeopardized the entire financial activity, including real estate. People were putting off big-ticket purchases to meet the basic necessities. Thus, the demand for houses was at an all-time low.

But, after the covid pandemic, the demand for houses skyrocketed. This was because the pandemic had enhanced the significance of a home. Houses were an essential asset and became offices and schools all in one. With the new trend of work from home getting popular, people wanted to upgrade their current housing or move to a new home. This led to a boom in the housing market, and house prices were at an all-time high.

Current State of the Housing Market

Each recession is different, and so is the impact on the housing market. While the 2008 recession saw a crash in the housing market, the 2020 recession saw a housing boom. It's unknown how the new recession will impact the housing market, but economists have some predictions of potential impacts. Before the impact, let's analyze the housing market's current state:

The Housing Market Cooling Down

The housing market saw a boom during the pandemic. There was a rise in house purchases due to government subsidies and historically low mortgage rates. Now that the pandemic has ended, the Federal Reserve has withdrawn the assistance, and mortgage rates have increased. That's why the real estate market, which had been piping hot, has begun to cool down.

Supply Is Short, and Demand Is High

The current housing market is neither a buyer nor a seller market. On one side, the demand has decreased, and home sales are low, whereas, on the other side, the demand for the house is still high compared to the supply. This has resulted in increased competition in the housing market, and potential buyers have a hard time finding a home.

Housing Prices High — Source: pchvector (Freepik)

High Mortgage Rate

Current mortgage rates are at an all-time high due to the Federal Reserve trying to curb the decade-high inflation by raising the interest rate. In 2022, mortgage rates surpassed 5% for the first time since the 2008 housing market crash. High mortgage rates have sidelined most potential home buyers resulting in less demand for homes.

High House Prices

House prices are at an all-time high. This is due to the low supply as home construction activities were halted during the covid-19 pandemic. The housing market faced low supply, and the pandemic worsened it. Due to low supply and high demand, the prices of houses surged. However, with demands decreasing, house prices also are starting to cool off.

Affordability Crisis

Due to high house prices, increased competition, high mortgage rates, decade-high inflation, and potential threats of recession, this has raised a serious question mark on the affordability of the housing market. The potential buyers are pausing their homeownership dream since they cannot afford the current housing market.

Potential Impact on the Housing Market

Economists have differing predictions about how the recession will affect the housing market. Some economists believe this is not a recession in the housing market, and it is implausible for the market to crash. This is because demand for homes remains strong due to solid employment numbers and an inadequate supply of homes. But, they anticipate a short-term drop in the house price and sales due to the market conditions.

Likewise, other economists have started comparing the housing market to the 2008 crisis. They believe that the housing market follows the same trend and have predicted the housing market crash. High house prices, mortgage expenses, and ongoing consumer inflation are among the causes fueling predictions that the U.S. housing market may crash.

Affordability is the greatest challenge facing the housing market. The demand for the housing market is falling as more buyers put their homeownership dreams on pause. The sales of new U.S. homes dropped to an all-time low, and mortgage lending is also low. On the other hand, the mortgage rates are at an all-time high, but the supply of homes is at an all-time low. Home construction was halted due to the pandemic, and the builders had difficulty meeting the existing demand. The inventories for the home are record low.

Thus, it's highly likely that the housing market won't crash based on the current supply and demand equation. While the trend is similar to the 2008 housing market, the current housing market is quite different. The supply is way too low to keep up with demand. This indicates that while the housing market is heading for a cooldown, there won't be a crash unless there is a drastic change in the supply and demand equation.

What Cities Might See the Major Impact?

While the recession hits all of the USA, some cities might face more impact than others. The housing markets where home prices skyrocketed during the pandemic are highly likely to see a significant housing downturn.

Redfin, a Seattle-based real estate brokerage, analyzed 98 major housing markets in the United States and rated them based on the risk of the downturn. It considered various risk indicators to come up with the overall risk score, with the highest possible score of 100 and the lowest 0.

According to the report from the Redfin, the following are the most susceptible cities to a housing downturn if the recession hits:

Cities	Overall Risk Score
Riverside, California	84
Boise, Idaho	76.9
Cape Coral, Florida	76.7
North Port, Florida	75
Las Vegas, Nevada	74.2
Sacramento, California	73.1
Bakersfield, California	72.2
Phoenix, Arizona	72
Tampa, Florida	70.7
Tucson, Arizona	70.1

Source: redfin.com

Riverside, California, tops the list with an overall risk score of 84 out of 10. It's due to its high volatile home prices as it was once a hot destination during the pandemic. People were migrating to California or buying secondary homes there, resulting in a housing boom. But if demands fall, the housing market price will plummet significantly.

Similarly, Boise's market is already seeing a downturn as most people who moved to Idaho during the pandemic are moving back or shifting to more affordable places.

Click here to see the full report.

How to Prepare for the Housing Market Recession?

With the housing market uncertainty, it's important to prepare financially to withstand the recession. Here are some tips to prepare for the housing market recession:

Budget Better

The key to withstanding the storm of recession is to budget better and save as much money as possible. Check out this article for a guide for budgeting better for the recession.

Hold Your Dream of Homeownership

If you are a potential homebuyer, it's best to hold on to your dream for a while. The mortgage rates are at an all-time high, and home prices are also high. The housing market is still hot and is slowly cooling down. That being said, when to buy the home is your personal decision. If you really need to purchase a home and find one within your budget, you should buy it.

Don't Pay For More Than the Home Is Worth

The current housing market has high competition, and you might be desperate to pay a bit more to close the deal but don't pay more than it's worth. You might be underwater when the market rights itself.

Don't Buy More Than You Can Afford

The mortgage rate is at an all-time high, and you don't want to buy more than you can afford. This can result in default and foreclosure of your home. Thus, look for the one under your budget. If you think you can't afford to live in the house you are currently living, then you can consider downsizing.

Pay Off Your Mortgage as Much as You Can

The mortgage rates are high. So, you want to lower your mortgage payments as soon as possible. If you can afford it, consider paying more significant down payments and mortgage payments to reduce your mortgage amount.

Act Quickly

If you are considering selling your house, you should act quickly and sell off the property. House prices are slowly cooling down, and you could lose significant profit if you delay selling your home.

Refinancing

Most people regard houses as ATMs during financial hardships. You can consider refinancing if you have difficulty meeting your financial obligations during the recession. But, it's crucial to consider several factors when deciding whether to refinance your mortgage, including mortgage rates, loan amount, home equity, and the cost of the process. Currently, the mortgage rates are at an all-time high, which might not be ideal for refinancing but look for other factors to determine if it is worth it. Check out this article for a guide to refinancing during the recession.

Choosing the right lender is crucial when refinancing your home loan. So, here are our top recommendations:

Conclusion

With the recession around the corner, the piping hot housing market has started to cool down. A recession impacts every aspect of the economy, including the housing market. While most people view recession negatively, every recession is different. The 2008 recession significantly impacted the housing market, leading to the housing market crash, whereas the 2020 covid recession led to the housing boom. Therefore, recessions have varying impacts on the housing market. While there are mixed opinions about the current recession's impact on the housing market, it's prudent to be ready just in case.