How A Recession Will Affect Home Prices

Performance Property Real Estate Question

Q: A lot of people are predicting a recession. If it happens, how will a recession affect real estate home prices? Stuart, Kenilworth, NJ

A: Home prices have remained steady or risen during the majority of the last few recessions in the US. High mortgage rates can deter people from buying, but as the recessions of the ’80s and ’90s showed, when mortgage rates rose to almost 20%, high rates don’t mean demand or home prices will fall. What really determines how the real estate market is affected by recession is the impact it has on housing demand and home affordability. Nationally, today’s median income is around 30% of the median home price. In 1980, that number was almost 45%. So homes were 50% more affordable in the past than today, but demand relative to housing supply is higher now.

Here are 3 ways a recession may affect home prices:

  1. A recession can lead to higher rates of foreclosures, which adds to inventory levels and may moderate home prices.
  2. A recession should put upward pressure on lending rates that should reduce the demand for homes and in turn cool home prices.
  3. Despite the limited supply of homes, if the recession scares home buyers and no one wants to buy, home prices will still fall or grow at a slowed rate.

The U.S. currently has a roughly two-month supply of available homes on the market, up from the historically low six-month average. Even as mortgage rates have risen, many homebuyers are still interested in purchasing homes. This has continued to put upward pressure on home prices. People tend to buy and sell homes based on life events (marriage, divorce, new job, new baby etc.) not based on general economic conditions. I think supply and demand more than whether there is a recession will determine the direction home prices go. Thanks for your question, Stuart.

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