What Happens to the Housing Market During a Recession?
Understand how economic downturns reshape the housing market and its various elements.
A recession represents a significant and widespread downturn in overall economic activity, typically lasting more than a few months. This period is often characterized by a noticeable decline in production, employment levels, and real income across various sectors of the economy. While there is no single official definition, a common practical indicator used by many commentators and analysts is two consecutive quarters of decline in a country’s real Gross Domestic Product (GDP). Such economic contractions are a recurring phase within the broader economic cycle, signaling a period of reduced output and often leading to lower consumer spending.
Movement of Home Values
During a recession, home values are influenced by economic forces. Property values often experience a slowdown in their rate of appreciation or, in some instances, outright depreciation. Reduced demand, stemming from job insecurity and general economic uncertainty, can place downward pressure on prices as fewer potential buyers are actively seeking homes. An increase in the available housing supply, potentially from homeowners facing financial distress, can further contribute to this downward trend.
Not all recessions impact home values uniformly across the nation. Historical data reveals that in some past U.S. recessions, home prices have actually increased, and in others, any decline was minimal. Local market conditions, including existing inventory levels and the specific economic drivers of a region, play a substantial role in determining how profoundly property values react. The severity and duration of the economic downturn also influence the extent of any price adjustments.
Changes in Market Activity
A recession brings shifts in housing transactions and market dynamics. Buyer demand decreases as individuals face job insecurity, reduced consumer confidence, and financing difficulties. This environment often results in slower home sales and less competition among prospective buyers. Fewer buyers actively participating in the market can mean homes remain listed for longer periods.
Seller behavior also adjusts during these times. Some homeowners, if not facing immediate financial pressure, might choose to delay selling their properties, hoping for a market recovery. Conversely, financial distress can compel other homeowners to list their properties, potentially increasing the overall housing supply. This imbalance between reduced buyer interest and a potentially shifting supply can lead to sellers needing to adjust their expectations, sometimes accepting lower offers or more buyer-favorable terms to complete a sale.
Role of Financing and Affordability
Financing availability and cost, including mortgage rates and lending standards, change significantly during a recession, directly influencing housing affordability. Central banks often respond to economic downturns by implementing monetary policies, such as lowering benchmark interest rates, to stimulate the economy. Such actions can lead to a reduction in mortgage rates, potentially making borrowing less expensive for qualified individuals.
Despite potentially lower interest rates, lenders frequently tighten their underwriting criteria due to increased economic risk. This tightening can manifest as higher credit score requirements, demands for larger down payments, and more stringent income verification processes for loan applicants. These changes in lending standards can make it more challenging for potential homebuyers to qualify for a mortgage, even if interest rates are favorable. As a result, the pool of eligible buyers can shrink, affecting overall market activity and affordability.
Homeowner Financial Stress
A recession can place financial stress on homeowners. Job losses, reduced work hours, or decreased income are common occurrences during economic contractions, making it difficult for some individuals to meet their ongoing mortgage obligations. This financial strain can lead to increased mortgage delinquencies, occurring when homeowners miss scheduled payments.
If delinquencies persist, lenders may initiate foreclosure proceedings, a legal process allowing them to take possession of the property. The process typically begins after a homeowner has missed payments for a certain period. An increase in foreclosures can contribute to the supply of distressed properties on the market. However, many homeowners today possess substantial equity in their homes, which can provide a buffer against foreclosure by offering options such as refinancing or selling the property before a forced sale.