What a recession would mean for the housing market (Podcast)

July 6, 2022 - 5 min read

What would a recession mean for home buyers?

There’s a lot of talk (and worry) about the possibility of a recession lately.

Is one coming? If it does, will it be as bad as the last time around? Most importantly — for home buyers and homeowners, at least — what would it mean for home prices?

Mortgage expert Arjun Dhingra covered the topic in a recent episode of The Mortgage Reports Podcast. Here’s what you should know.

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Is a recession coming?

First off, Dhingra says, “I’m not here to predict that a recession is coming or not coming. I’m here to look at trends, follow data, and revisit history in terms of past recessions.”

While doing so won’t give us a clear “yes” or “no” as to whether a recession is in the cards, it can help us be on guard for the possibility of one — and understand how the market might react if one arises.

Four recession indicators

To get a feel for whether a recession might occur, Dhingra says there are certain indicators or “red flags,” as he puts them, that we can look out for.

1. High unemployment

The first indicator of a recession is unemployment — specifically, rising unemployment.

“If businesses start to lay off employees and that unemployment rate starts to tick up, that means businesses are anticipating or have already experienced a little bit of a slowdown in people coming in and buying goods, purchasing services, or just spending money,” Dhingra says.

Higher unemployment also means consumers have less spending money, and there are fewer dollars going into the economy.

2. High inflation

Inflation is another indicator. As inflation increases, money holds less value.

Unfortunately, inflation is currently at a four-decade high. According to Dhingra, it’s likely to remain elevated at least through summer and maybe into early fall.

“If inflation is continuing to run hot, you have people spending less money because things are more expensive,” Dhingra says. “That means less earnings for companies and small businesses, which leads to slower growth.”

3. Tighter Federal Reserve policies

The Federal Reserve also influences whether the economy heads into a recession or not.

Recently, the central bank has been taking drastic measures to combat inflation. Just last month, it announced a 75-basis-point hike in the benchmark interest rate, which makes short-term borrowing more expensive.

“Every time that they do this, their hope is to somehow temper demand or pull money out of the money supply,” Dhingra says. “The definition of inflation is too many dollars chasing too few products, so if some of these dollars are pulled out of the system, you’ll have less activity, and that will naturally cool the economy.”

The Fed has another meeting in July where it could vote, yet again, to increase the fed funds rate. “I think we will see the Fed continue to need to take big actions,” Dhingra says. “They’re trying to take this very, very seriously.”

Keep in mind that the Federal Reserve does not set mortgage interest rates. However, mortgage rates tend to follow the broader market and we’ve seen them increase following recent Fed rate hikes. While there’s no guarantee mortgage rates will continue to track the benchmark rate, there’s a good chance they could rise after the upcoming Fed meeting.

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4. Waning builder confidence

Finally, there’s homebuilder confidence to consider. Housing starts have slowed in recent months, and builder confidence is down.

“Builders are very weary and many of them are still gun-shy from 12 years ago, when they overbuilt,” Dhingra says. “They’re trying to be very cautious, but supply chain issues, labor shortages, and the cost of materials are slowing homes being completed.”

According to the National Association of Home Builders, builder confidence has dropped for six consecutive months. As the trade organization recently put it, “Weakening builder confidence points to economic troubles ahead.”

What happens to the housing market during a recession?

There are a few things to expect if we move toward a recession.

Mortgage rates could dip

First, as inflation cools, so should mortgage rates.

As Dhingra explains, “Inflation and mortgage rates trended the exact same direction, meaning if inflation is running hot, so are mortgage rates, and if inflation starts to cool off, mortgage rates also come down.”

Home prices are unlikely to fall

Meanwhile, home prices will likely hold steady or even increase.

“If we look back at the last six recessions, mortgage rates ended up coming down — because that is exactly what happens to mortgage rates during a recession — and home values held the line or slightly increased in value. As an asset class, real estate historically has been very protected and performed strongly during recessionary and inflationary periods.”

The last recession — during 2008 and 2009 — was a unique one due to the poor lending standards used by mortgage lenders back then... This time around, conditions are much different.

The last recession — during 2008 and 2009 — was a unique one due to the poor lending standards used by mortgage lenders back then. When homeowners lost their jobs, they didn’t have the funds to continue covering their mortgage payments, which led to a wave of foreclosures and a sudden oversupply of inventory. This sent home values falling.

This time around, conditions are much different. Not only is supply extremely low and demand high (even with rising mortgage rates), but lenders are much stricter in who they loan money to.

“The quality of the homeowner that’s in the United States right now is much, much stronger,” Dhingra says. “They’ve been thoroughly vetted, and they’ve had to go through a rigorous qualification process. They are very, very well-qualified, if not overqualified, for the mortgages they currently have.”

Bidding wars could cool down

Still, a recession would impact the market — just not drastically, Dhingra says.

“You have a lot of people looking to buy and very few homes to choose from, so those homes are not necessarily coming down in price,” Dhingra says. “If anything, sellers may be getting more realistic and pricing their homes where they appropriately should be priced.”

Remember that real estate is a long-term investment

Just remember: As with any real estate purchase, it’s not about right-timing the market, but about buying at the right time for your personal goals and finances.

Additionally, seeing the purchase as a long-term investment and wealth-builder is critical.

“As long as you have a long-term vision of where it is that you want to live, any hiccups in the short-term, be it a recession or inflation running out of control, are really secondary, if not moot,” Dhingra says. “Long-term real estate as an asset class has always done well — history can back me up on that.”

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Aly J. Yale
Authored By: Aly J. Yale
The Mortgage Reports contributor
Aly J. Yale is a mortgage and real estate writer based in Houston who has contributed to Forbes and worked for organizations such as The Dallas Morning News, PBS, NBC, and Radio Disney.