How Does The Housing Market Get Affected By Recession?

The housing market continues to surprise economists with its stubborn resistance to tighter monetary policy. 

Even though mortgage rates are approaching their highest levels in decades, house prices appear to be continuing to rise. 

With more rate hikes on the horizon, which some fear could trigger a broader economic slowdown, the question that remains for many analysts is: how will a recession affect the housing market??

Housing is a priority for many financial players as some expect property prices to fall in response to a possible recession. 

A recent Financial Times poll found that nearly 68% of economists expect a recession at some point in the next year. Perhaps rightly so. 

Inflation continues to erode consumer purchasing power, the US manufacturing sector continues to be hampered by supply chain hiccups caused by the war in Ukraine, and looming interest rate hikes will only further dampen aggregate demand in the country. 

Heck, according to Cathie Wood, ARKK fund manager, the US is already in a recession.

Despite the poor financial conditions in the country, house prices have only risen this year. In the first quarter of 2022, the value of homes increased by more than 15% compared to the previous year. 

In April, the housing market hit a record high of $407,000 in median house prices. And this is despite 30-year fixed-rate mortgage rates approaching 6%, their highest level since 2008, and up more than 2% since the start of the year.

Residential construction largely maintained its price growth due to the mismatch between housing supply and demand. 

The simple fact is that the United States is not building homes fast enough for potential buyers. In this regard, a recession poses a big question mark for the housing market in the future. How will a recession affect the housing market?

The United States currently has about two months of housing supply available on the market, which is below the historical six-month average. 

The Covid-19 pandemic has sharply slowed housing construction, which was already restricted after the 2008 housing crisis. 

On the other hand, many economists believe that there is pent-up demand for housing due to the highest interest rates. stockings enacted during quarantine. 

Even though interest rates have risen again, many buyers are still interested in buying a home. This puts upward pressure on house prices.

In the event of a recession, we can expect an accelerated realignment of the housing market. 

Despite the limited supply of housing, if nobody wants to buy, prices will fall, or at least grow more slowly. A recession will put upward pressure on lending rates, which should drastically reduce housing demand. 

By definition, this should lower house prices. However, the extent to which the housing market will relax is up for debate. Some expect prices to fall in the face of a recession. Others expect price growth to slow until housing picks up.

Even so, a recession still wouldn’t exactly create a buyer’s market for homes. An economic downturn means high mortgage rates, rising commodity costs, and limited wage mobility. 

While home prices may see some relief, buying a home during a recession is still, well, buying a home during a recession. The advantages may not outweigh the disadvantages.