By Erik J. Martin, CTW Features
We’re hearing a lot more talk lately about a nationwide recession, a scary word to many that triggers memories of the Great Recession of 2007 to 2009, after the housing bubble burst and significant market corrections occurred.
But just because economic numbers are pointing toward a recession this year or next doesn’t necessarily mean that we’ll enter this undesirable territory. Still, it’s helpful to better understand what a recession is, what causes it, and how it can impact the real estate market – especially if you are considering buying or selling a home in the near future.
“A recession is a significant economic slowdown in the form of higher unemployment, a drop in gross domestic product, lower wages, and less manufacturing output,” Jonathan Miller, president/CEO of Miller Samuel Inc. and a member of The Counselors of Real Estate, says. “A technical definition of a recession is two consecutive quarters of negative gross domestic product (GDP) growth, and we may actually already be in a technical recession, since the second quarter of 2022 looks like it may come in with a negative GDP, as the first quarter of this year did.”
Typically, recessions are caused by an imbalance in local, national, or global economic circumstances.
“The US economy contracts during a recession, with money and investments exiting riskier projects and entering more stable investments. A recession leads to an adjustment of prices and growth, often resulting in falling prices, including lower prices on homes for sale,” explains Dennis Shirshikov, a strategist with Awning.com. “A recession tends to slow down the housing market overall, as fewer people have access to credit and income to borrow and purchase homes.”
The last time we encountered a recession was between March and April 2020, when COVID first hit – a slump that was unusually short but deep. Recall that, during that period and throughout 2020, listing, showing, selling, and purchasing real estate was much more difficult due to pandemic-related issues and tighter finances experienced by consumers.
“It seems reasonable to assume that, in a recessionary environment, housing prices could feel some downward pressure. Even with the large run-up they’ve experienced just over the last 12 months, with home prices rising over 20% year-over-year, homeowners who are feeling financially strained might look to tap into the equity they’ve built up in their homes,” says Dr. Jim Schultz, a former finance professor at Winthrop University. “
But while home prices may dip during a recession, “other factors like low inventory may prop up home prices somewhat,” suggests Martin Orefice, founder/CEO of Rent to Own Labs. “Remember that housing inventory, especially on the low end of the market, is still distressingly low, and a recession would definitely make this worse. Many people would take their homes off the market to wait for better prices. New construction would slow down, too, and private equity firms would keep right on buying up available homes as investment assets or sources of rental income.”
While it’s difficult to predict precisely where mortgage rates would land during a forthcoming recession, some say rates would probably rise because banks are less likely to make loans.
“It would also get considerably more difficult to borrow from banks, as lending standards are usually tightened in the secondary market for mortgages tends to be slower in a recession,” Shirshikov continues.
However, consider that the Federal Reserve often cuts interest rates during a recession to stimulate economic growth, “the opposite of what they are trying to do now,” Miller notes.
Anticipate foreclosures likely to jump significantly if we veer into a recession. That’s because many people would lose their jobs and be unable to afford their mortgage payments. We observed a dramatic rise in foreclosures in the wake of the Great Recession years ago.
Ask Shirshikov, and he’ll tell you that a recession is likely, particularly in the second half of 2022.
“However, based on the current level of high employment and inflation, the recession would be relatively short to correct certain market fundamentals like the rising price of oil and consumer goods. Shortly after this correction, the economy would start to recover,” he predicts.
Orefice, on the other hand, says there’s simply too much volatility in the economy right now to be able to make a helpful recession prognostication.
“Jobs numbers look great, but inflation is being stubborn. The stock market is trending down lately, crypto is collapsing, and the war in Ukraine continues to throw wrenches into oil prices,” he continues.
Polina Ryshakov, senior director of research and lead economist for Sundae, says there’s no need to panic. “A lot of people are concerned about whether 2008 will happen again, but I don’t believe that is the case. Homeowners today have a lot of equity accrued in their homes because of appreciation over the last few years,” says Ryshakov. “And people will not be incentivized to walk away from their homes, especially if they are locked into low-interest payments, as it would be more expensive for