Do Housing Prices Drop During Recessions?

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If you sold your house in 2021, you likely saw a significant increase in its worth. Across the country, there were stories about prospective buyers offering 10% or more above the asking price and, in some instances and buying homes without even seeing them. Almost everyone saw a rise in the capital. According to Bankrate, real estate values increased 20% from 2021 to 2022 across the nation.

Throughout 2022, the prices of everything rose rapidly. Groceries, gasoline, and residential properties helped contribute to a 40-year high in inflation. As the Federal Reserve began raising interest rates to curb spending, the economy started to cool. Many believe the US is in a recession. So, could that make a home more affordable in the near future?

Supply and Demand Equation Out of Balance

Investopedia defines inflation as a rise in prices leading to the decline of purchasing power. During the COVID-19 pandemic lockdowns, the government infused trillions of dollars into the economy. Coming out of the restrictions resulted in massive demand for products and services, but the supply wasn’t available. As a consequence, costs rose on many consumer items.

Across much of the country, people didn’t sell their homes over much of 2020 and 2021. Additionally, construction slowed as expenses for lumber and other goods went up dramatically. Still, while interest rates were at an all-time low, buyers were in the mood to purchase a house and willing to pay more than the asking price.

Over the last six months, economists warned if the Federal Reserve acted too quickly to slow the economy, it could tip it into a recession. Generally, economists define an economy as entering a recession after two straight quarters of Gross Domestic Product (GDP) decline. On Wednesday, the Fed increased interest rates by 0.75%, sending a potential shock through the monetary system.

On Thursday, the government reported GDP was down for the second consecutive quarter by 1.6%.

Mortgage Rates Drop — Housing Sales Slowed, But Boom May Not Be Over

On Friday, reported the housing market is slowing down. That could be good news for homebuyers in the short term. Still, there’s one challenge: despite the government’s announcement satisfying the technical definition of a recession and a cooling housing market, mortgage rates dropped from 5.54% on Wednesday to 5.13% on Friday.

Matthew Graham, COO of Mortgage News Daily, told CNBC it was “an exceptionally fast drop!” Graham said rates could decline further. If so, it could drive buyers back into the market who didn’t qualify for a loan at a higher interest rate. That might result in properties selling for more again, at least for a time.

Still, if a recession lingers on or worsens, it could ultimately drive housing prices down and force a transition from a seller’s to a buyer’s market. In June, home sales declined for the fifth time in 2022. Yet, home values haven’t dropped.

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