The fundamentals of the housing market are strong. But is it
The United States has enjoyed
one of the largest economic expansions in its history since the
2008 housing bust brought the global economy to its knees. But with
each passing year, the recovery gets a little longer in the tooth,
questions about if or when a cyclical recession might take
These questions have gotten louder in recent months as rising
interest rates and tariffs have
wreaked havoc on the stock market, which had been hitting new
all-time highs on a regular basis. One of the most reliable tells
of an impending recession—the
dreaded Treasury bond yield curve inversion—occurred earlier
this month between 2-year and 5-year Treasury bonds, leading some
economists to sound their alarms.
If a recession does hit, how would it affect a
housing market that’s already starting to cool? With
the scars of 2008 still fresh, it’s understandable that some
would worry about another housing implosion. But most real estate
professionals don’t expect a possible recession to spell doom for
the housing market. Some even think it would hardly affect housing
“People’s incomes get squeezed [in a downturn], but they
still need a place to live,” said Aaron Terrazas, Zillow’s
director of economic research. “Usually what that means is
they’re still in the market if they need one, but their
price-point is lower.”
Housing in previous recessions
It’s somewhat counter-intuitive, but recessions don’t
necessarily mean bad things for the housing market. In fact, they
ATTOM Data Solutions, a leading real estate data provider,
looked at home prices during the five recessions since 1980 and
found that only twice—in 1990 and 2008—did home prices come
down during the recession, and in 1990 it was by less than a
percent. During the other three, prices actually went up.
“Housing is such a basic need that it won’t necessarily do
well, but [it will] at least truck along,” said ATTOM’s Daren
Blomquist. “It may flatten out a bit, but people still need
somewhere to live, so that basic need is going to cause how the
housing market—and particularly home prices—to continue to go
ATTOM data also show that rents are even less impacted by a
recession. During the housing bust in 2008, the average fair market
rent for a three-bedroom property, as calculated by the U.S.
Department of Housing and Urban Development, rose at a steady clip
even as home prices cratered. Rents likely rose as homeowners who
had to go into foreclosure during the crisis added new demand for
That doesn’t mean that every housing market in America will go
unfazed. Real estate professionals like to say there’s no such
thing as a national housing market, as each city has it’s own
dynamics between supply and demand. Depending on the cause of the
recession, it could hit some cities but not others.
For example, the recession in 2001 was caused by the collapse in
stock market value of companies trying to take advantage of the
newly popularized internet. This caused home prices appreciation in
the San Francisco to slow, particularly at the high end of the
market. But some other cities were largely unaffected.
Current housing market appears poised to weather a
Affordability concerns have plagued the housing market over the
last few years, as home prices have long since surpassed their
pre-crisis peaks in most markets. High prices have led to a slow
down in housing activity, particularly in high-cost markets like
San Francisco and New York.
inventory spikes on the West Coast, housing supply for sale
remains tight across the country, as home builders have been slow
to produce. At the same time, the strong economy coupled with a
millennial generation coming of age has added new demand in the
housing market. Low supply and high demand means higher prices.
For a recession to impact the housing market, it would need to
fundamentally alter this dynamic between supply and demand. A spike
in unemployment could negatively impact demand, particularly if an
intensifying trade war leads to export tariffs, which could put
jobs at risk. But with unemployment already unusually low, it would
take a pretty dramatic rise to cause home prices to drop.
It’s even harder to see the supply shortages being alleviated
by a recession in a way that impacted prices. If a trade war leads
to tariffs on imported construction materials, the cost of new home
construction could rise even higher than it already is. Tight
immigration policy could make construction labor more scarce as
“It really depends on … the magnitude of [foreign] tariffs,
and then how aggressive the federal government is at placing
tariffs on imports that go into the housing market,” said Ralph
McLaughlin, an economist with CoreLogic.
Rising interest rates would prevent a number of potential
homebuyers from qualifying for a mortgage and also lower the price
point for some wealthier homebuyers. But if a recession hits, the
Federal Reserve is almost certain to lower rates in order to jump
start the economy, meaning any pain caused by rising rates would
likely be temporary. The Fed has also signaled that in the short
term it intends to
keep rates where they are, and
President Trump has made no secret of his opposition to the rate
The current rate on a 30-year fixed mortgage is at 4.83 percent,
according to Bankrate. For perspective, rates reached highs of 18.5
percent in 1981, so even a rise above 5 percent would be
historically quite low.
Why this time won’t be another 2008
For a lot of millennials, the only recession they have specific
memories of is 2008.
That recession not only caused complete chaos in the housing
market, but was directly caused by chaos in the housing market.
So it’s natural that a lot of people would equate recessions with
a housing collapse, but 2008 was a unique case, and today’s
housing market in many ways is the complete inverse of the housing
market in the run up to 2008.
Primarily, the shoddy mortgage lending practices that flooded
the market in 2004 are not present today. In the years before 2008,
mortgage lenders made loans to unqualified buyers, or subprime
buyers, without verified income or down payments and pushed those
buyers into risky loan products that were destined to fail.
Those loans were bundled in to bonds, known as mortgage-backed
securities, and dispersed throughout the entire global financial
system. When the subprime loans in the subprime bonds started
defaulting en mass, the securities failed, too, leading to a
financial collapse on a scale never seen before.
But today, mortgage lending is so strict that some in the
industry think lenders over-learned the lessons of 2008. The
Dodd-Frank legislation passed during the Obama administration
enacted strict standards for what types of loans the
government-sponsored mortgage facilitators Fannie Mae and Freddie
Mac will buy.
The vast majority of mortgage lenders originate a mortgage and
then sell it to Fannie or Freddie, so mortgage lenders confirm to
the strict standards set by Dodd-Frank. In short, mortgage lending
practices today are air-tight, whereas in 2008 they were as sloppy
and risky as they’ve ever been. As a result, subprime mortgage
bond issuance is a tiny fraction of it was prior to the crisis.
One of the factors in the 2008 collapse that isn’t talked
about as much is the oversupply of housing. Going into the 21st
century, regional home builders consolidated to form large national
companies, and they were churning out houses in volumes that dwarf
the pace of building today.
Real estate speculators often purchased this oversupply, and
when the crisis hit, they just let those houses go into default
because they hadn’t put any money down on it anyway. This led to
massive housing supply for sale during the collapse, which pushed
prices into free fall. But today, housing supply today is
“A correction can only go so far because of [the housing
supply] dynamic,” said Eric Abramovich, co-founder of
home-flipping lender Roc Capital. “I think there’s a floor
[today], as opposed to 2008 when there was no floor.”
While the specific mechanics of the 2008 collapse won’t play
out if there’s another recession, economists have speculated
whether the psychological scars of the crisis would lead to
unwarranted panic in the housing market if the economy starts
“The psychological component I think is absolutely dark horse
in what might happen in the next downturn,” McLaughlin said.
“The more that we can provide data out there to help such
households make more rational decisions in the housing market the
Source: FS – All – Architecture 10
How a recession could impact the housing market