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How the Housing Market Performs During a Recession

How the Housing Market Performs During a Recession

Last updated 14th Oct 2022

The pandemic may be over, but it has well and truly left its mark on the world. Along with the change to working from home and even more time spent on TikTok, the impact on the economy has been a significant part of that. Right now there is a huge amount of talk on a potential recession looming, but consumers are feeling confused given the mixed economic messages.

Buying a house is a crucial goal for most families in hopes of a stable lifestyle, but these days it's no easy feat. It’s likely to be the biggest purchase most people will make, so it’s understandable that this talk of a recession is making some first time buyers nervous.

So how does a recession affect the housing market and is it a good idea to buy a house during a recession?

We don’t have a crystal ball, but what we can do is look into the past to give some clues as to what could potentially happen in the future. To paraphrase Mark Twain “history doesn’t always repeat itself but it sure does rhyme.”

What is a recession?

Before we get into the housing market, let’s first just clarify what a recession is. A recession is a period of low economic activity that is generally punctuated with periods of negative economic growth.

It used to be that an official recession was classed as two consecutive quarters of negative GDP growth, but that definition has now widened. It’s now down to the National Bureau of Economic Research (NBER) to decide when the US is in a recession, and they use a broader set of data points including consumer confidence and the unemployment rate.

We’re seeing a lot of data leans towards a recession, but so far the NBER has held off on announcing it. This is mainly due to the fact that the labor market is holding up surprisingly well and consumer confidence remains steady.

Recessions aren’t really all that common. Since 1980 the US has seen six of them, with the most recent at the outset of the Covid pandemic lasting just 33 days.

What Does a Recession Mean for Home Prices?

One of the main factors influencing how the housing market performs during a recession is the reason behind the recession. If we look at the 2008 global financial crisis, this came off the back of a collapse in the housing market.

Obviously, housing didn’t perform well during that time.

Based on figures from the U.S. Federal Housing Finance Agency’s House Price Index, the average homeowner who bought in at the peak will have seen their property value fall by almost -16% over the next five years.

That’s not good, but fast forward 10 years from the peak and those same buyers were back in the green, with an average total return of 7.73%. Not great, but also not that bad for a purchase made at one of the worst times in history.

The early 2000’s was another major recession in the US, kicked off by the bursting of the dot com bubble. Throughout this recession the property market went through the roof. Buyers who got in at the beginning in early 2001 saw their average property value increase by 48.59% over the next five years.

Property even grew while the recession was happening, gaining 6% from the start of 2001 until the start of 2002.

Because the recession was unrelated to the property market, it was able to remain relatively detached and uncorrelated from the other issues facing the economy and stock markets.

Back to more recent times, and the Covid induced recession in early 2020 was the shortest and surely one of the most unusual the world has ever seen. The property market was just as unusual.

Despite the widespread panic and fear that gripped the world, real estate went gangbusters. The work from home revolution caused a mass shift in the living and working patterns for millions of people, and those who were brave enough to buy during this time have seen a big win in their property values.

From the start of the pandemic until mid 2022, the average property price in the US has increased by almost 30%. Very nice.

Of course it remains to be seen how the housing market will hold up in the coming years. Inflation has been at record highs for some time now and the Fed is committed to raising interest rates to combat it.

This will make mortgage rates more expensive, which could place a damper on the housing market with homeowners locked into attractive rates they would lose if they were to move and re-finance.

What Should Home Buyers Do?

With the amount of information available to us now, it’s easy to fall into the trap of overthinking even the smallest decisions. What to have for lunch, what brand of new sneakers to buy, where to go on vacation.

It’s no surprise that making a major decision like whether to buy a house can be paralyzing.

Whenever considering any financial decision it’s vital to keep an eye on the long term. As we’ve already seen, the property market tends to go up over long periods, even if a buyer purchases at the worst possible time.

With that in mind, buyers who are in the market should ask themselves one main question in order to gain an understanding of whether they should be following through with their purchase plans, if a recession appears to be on the horizon.

What am I buying the property for?

If you’re in the market for a family home that you’re planning on living in for 10 or 20 years, you shouldn’t worry too much about what the property market is doing right now.

Obviously it’s right to be sensible and to try and find a good deal, but in the grand scheme of things you’re not making the purchase from a purely financial perspective. It’s much more important to make sure that the property fits all the criteria you need for a good life, rather than a good investment.

Things like the school district, transport links, suitability of the home itself and proximity to family and work are all much more valuable than trying to maximize the percentage return when you sell.

On the other hand, if you’re looking to flip a property quickly there is a lot more risk involved.

As we’ve seen from the data, property sometimes performs very well during and after a recession, and sometimes it takes a serious knock. There’s no way to know which, and that’s why investors should really only enter into a new venture with a minimum of a 5 year investment time horizon.

The Housing Market is Unpredictable

To bring this all together, the key point is that no one knows exactly what the housing market is going to do. No one knows exactly how the housing market is going to perform during and after a recession.

We’ve seen times where real estate values have grown at a rapid rate despite increases in unemployment and low economic growth. We’ve also lived through one of the worst recessions in history that was caused by the collapse of the property market.

All in all, buying a property has many similarities in buying any other investment asset. You need to understand why you’re buying it, consider the worst case scenario and be willing and able to hold on to it for the long term.

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Jason Mountford

Jason Mountford

Jason Mountford (DipPFS MAppFin) is a writer, podcaster and financial commentator, as well as a qualified Financial Adviser in both the UK and Australia. He has written for and appeared in publications including Express.co.uk, Ageco, Daily Mail, Money Marketing, Forbes, FT Advisor and Proactive Investor. Jason holds a Master's Degree in Applied Finance.