Is a recession coming? Here’s what that means for housing

Two cranes swing overhead at an apartment building construction site.Recession
fears have unsettled the market, but many economists feel the
housing sector is more fundamentally sound than it was during
previous recessions. | Shutterstock

Experts agree that the housing market is on much firmer footing
than it was in 2008

A bevy of negative news this week has once again stoked fear
that an economic downturn is imminent.

Yesterday, the Dow Jones Industrial Average had its worst day of
the year with
an 800-point dive.
Then, news broke that
the bond yield curve has inverted,
a sign that the market
believes investing in the short-term is more risky than investing
in the long-term, which economists have identified as a consistent
signifier of a future recession. With trade war tension already a
front page story, is the market headed for a recession, and if so,
how will that impact real estate markets?

There’s been a widespread feeling that the decade-long
economic expansion has been due for a correction, and homebuyers
have felt nervous about the future. A
Realtor.com
survey released last month found consumer
confidence fell 4.4 percent over the past year, which the author
felt could reflect consumer concerns over a potential recession or
future economic growth.

But, as Curbed’s Jeff Andrews found earlier this year,

recessions don’t always impact housing with the same force as the
job market or other sectors of the economy
. According to ATTOM
Data Solutions, a leading real estate data provider, only twice in
the last five recessions—in 1990 and 2008—did home prices come
down. In 1990, prices decreased by less than a percent. During the
other three, prices actually went up.

Housing market fundamentals remain strong

Javier Vivas, director of economic research at
Realtor.com
, says that the inverted yield curve is often a red
flag for economic trouble, and that right now, it definitely
signals a loss of economic momentum. But he doesn’t believe the
housing market is in nearly as much trouble as it was during

the last recession.

“The short term impact to housing is less likely to be as
reactive,” he says. “The impact of the last recession is fresh
in our minds and can have a play in home buyer psychology. But
barring weak fundamentals, housing tends to perform fairly well
during recessions. Over-construction is largely what got us into
trouble last recession, and we’ve experienced just the opposite
since then.”

As Andrews pointed out,
the last recession was specifically caused by chaos in the housing
market.
Mortgage lending standards had eroded to the point that
mortgage bonds—spread throughout the global financial
system—were ticking time bombs. When the bombs went off,
homeowners defaulted and the housing market went into free fall.
Today, mortgage lending is considerably more strict, and the
housing market is on much stronger ground.

Vivas says lower mortgage rates are giving a “second wind”
to homebuyers this summer. He still expects the continued lack of
inventory in major markets, not the stock market, to be the real
force holding back home sales.

A market with low supply and high demand

Right now, a recession would need to make a significant dent in
either housing supply or demand to move prices. That’s difficult
to do at a time of unusually low unemployment, as well as
undersupply in so many housing markets, especially pricey coastal
metros.

Just last month,
Realtor.com
predicted the resurgence of national inventory
declines, which in just a few months would lead buyers to see a
drop in the number of homes for sale that could “lead to the
return of bidding wars, stronger price appreciation, and quicker
home sales.”

According the National Association of Realtors Chief Economist,
Lawrence Yun, the Federal Reserve will be forced to cut interest
rates from what he calls “a policy mistake of trade war
rhetoric.” Slowing global trade has cascading effects:
Businesses, which are financially healthy, are unwilling to spend
on expansion, and investors are unhappy at the prospect of slowing
global commerce, hence a stock market selloff. When imports and
exports fall, Yun says, America goes into a recession with job
cuts. But he does see some potential benefits for the housing
sector.

“Low interest rates are unlikely to lift business investment
in such a cloudy environment,” he says. “But the housing sector
though could get a boost from favorable mortgage rates.”

Yun believes that there’s still time to get the economy back
on track, with solid GDP expansion and job creation.

“Make it clear the federal government will allow businesses to
pursue ways that is most efficient and convenient, including
foreign transactions,” he says. “Such conditions will boost
economic outlook and get the bond yield curve away from
inversion.”

Source: FS – All – Architecture 10
Is a recession coming? Here’s what that means for housing