What Every Homeowner Needs To Know About a Recession

Are we currently in a housing bubble... or is this the “new normal”? If this bubble pops, does a recession mean home values will plummet? These are all questions homeowners, and future homeowners, are asking themselves.

A recession does not have to equal a housing crisis. That’s the one thing that every homeowner today needs to know. Everywhere you look, experts are warning we could be heading toward a recession, and if true, an economic slowdown doesn’t necessarily mean a housing market crash.

The National Bureau of Economic Research (NBER) defines a recession this way:

“A recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators. A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”

To help show that home prices don’t fall every time there’s a recession, take a look at the historical data below. We have experienced six recessions in this country over the past four decades. As the graph shows, looking back all the way to the 1980s, home prices appreciated four times and depreciated only two times. This means historically, there’s proof that when the economy slows down, it doesn’t guarantee home values will fall or depreciate.

The first occasion on the graph when home values depreciated was in the early 1990s when home prices dropped by less than 2%. This happened again during the housing crisis in 2008, when home values declined by almost 20%. Most people vividly remember the housing crisis in 2008, because this is the most prominent memory of a recession, we often think if we were to fall into a recession that we would repeat the same pattern.

What makes it different today? The current housing market is not a bubble waiting to burst. The foundation and fundamentals of the market are very different than they were in 2008. Yes, rates are going up and that could cause a slight decrease in prices, however, we will not see the dramatic incline of foreclosures and drop in housing value.

A report by the Federal Reserve Bank of Dallas called the current housing market “abnormal,” but concluded that “there is no expectation that fallout from a housing correction would be comparable to the 2007–09” crisis. “Household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom,” said the report, adding that market participants and regulators are better equipped with tools and early warning detectors to avoid such a crisis.

The Takeaway

We’re not currently in a recession in the US, but if one is coming, it doesn’t mean homes will lose their value. History proves a recession doesn’t have to equal a housing crisis.

We cannot predict the future of the market, but we do know what is happening now. It is no secret that interest rates have been on the rise, and as a buyer, waiting for this “bubble to pop” may end up causing more harm than good in your home search and monthly payment!

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