Everywhere you look, people are talking about a potential recession. And if you’re planning to buy or sell a house, this may leave you wondering if your plans are still a wise move. To help ease your mind, experts are saying that if we do officially enter a recession, it’ll be mild and short. As the Federal Reserve explained in their March meeting:
“. . . the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”
While a recession may be on the horizon, it won’t be one for the housing market record books like the crash in 2008. What we have to remember is that a recession doesn’t always lead to a housing crisis.
To prove it, let’s look at the historical data of what happened in real estate during previous recessions. That way you know why you shouldn’t be afraid of what a recession could mean for the housing market today.
To show that home prices don’t fall every time there’s a recession, it helps to turn to historical data. As the graph below illustrates, looking at recessions going all the way back to 1980, home prices appreciated in four of the last six of them. So historically, when the economy slows down, it doesn’t mean home values will always fall.
Most people remember the housing crisis in 2008 (the larger of the two red bars in the graph above) and think another recession will be a repeat of what happened to housing then. But today’s housing market isn’t about to crash because the fundamentals of the market are different than they were in 2008. Back then, one of the big reasons why prices fell was because there was a surplus of homes for sale at the same time distressed properties flooded the market. Today, the number of homes for sale is low, so while home prices may see slight declines in some areas and slight gains in others, a crash simply isn’t in the cards.
What a recession really means for the housing market is falling mortgage rates. As the graph below shows, historically, each time the economy slowed down, mortgage rates decreased.
Bankrate explains mortgage rates typically fall during an economic slowdown:
“During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.”
This year, mortgage rates have been quite volatile as they’ve responded to high inflation. The 30-year fixed mortgage rate has hovered between roughly 6-7%, and that’s impacted affordability for many potential homebuyers.
But, if there is a recession, history tells us mortgage rates may fall below that threshold, even though the days of 3% are behind us.
You don’t need to fear what a recession means for the housing market. If we do have a recession, experts say it will be mild and short, and history shows it also means mortgage rates go down.
This is a term that I see getting battered around lately in the media, “housing recession.”
Presently, the Federal Reserve’s aggressive efforts to ratchet up interest rates have spurred concerns that the Boston condo for sale market is heading toward a “housing recession.”
Let’s take a deeper dive into the possibility of a “Boston housing recession.” For starters, mortgage rates nearly doubled in the first half of the year. Builder confidence has declined the most since the 2008 meltdown, and nationally new home sales last month were down 30 percent from the previous year.
Spending on housing accounts for as much as 18 percent of GDP, and the sector typically leads recoveries. So, even as the Biden administration touts the strength of the labor market and consumer spending holds up, a prolonged downturn in the housing market could deepen any potential recession on the horizon for the U.S. economy.
The rise in mortgage rates, driven by the Fed’s rate hikes, priced many would-be Boston condo buyers out of the market. It could get worse if mortgage interest rates continue to rise through 2022 into 2023.
Goldman Sachs economists predicted that home price growth would “slow sharply in the next couple quarters” and fall to 0 percent in 2023.
The deteriorating market has pushed sellers to slash their asking prices. More than a fifth of the homes for sale saw price drops in July, according to Redfin, the highest level the firm has recorded since it started tracking the data in 2012.
According to Jeff Tucker, senior economist at Zillow. Housing inventory growth is leveling off in recent weeks as sellers start to reconsider listing their homes. New listings fell 2.8 percent in July, according to Realtor.com data.
There’s a supply pullback following the demand pullback of earlier this summer.
Once inflation abates, mortgage rates will decline and Boston condo for sale demand will return — there are still just not enough homes for people who want them, so demand is resilient. The supply of existing homes for sale remains below pre-pandemic levels.
Things are going to turn around probably sometime next year, but I’m not sure how positive a turnaround it will be — if it’s going to come back full steam or it’s going to be a lackluster recovery because of the economic backdrop.
First and foremost, the Boston condo for sale market historically has been very resilient in past recessions, so I don’t see any Boston housing recession in the cards thus far. The big unknown, is how far will the Federal Reserve fight on inflation by raising interest rates halt. Will we see hike going into 2023? Most experts say not, but if it does this can have devastating impact on the nations housing market moving forward,
Updated: Boston Real Estate Blog 2022