As rising interest rates and tariffs wreaked havoc in the stock market in early January of this year, the yield curve inverted. This yield curve inversion made long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.
Since yield curve inversions have historically preceded many US recessions, economists and others are now saying the word “recession” out loud, instead of whispering it. And now that the “R” is out in the open, the question is, how would our already cooling housing market be affected if and when a recession does actually hit?
Most housing experts think a recession would not spell gloom and doom for the housing market. Aaron Terrazas, Zillow’s director of economic research, said, “People’s incomes get squeezed (during downturns) but they still need a place to live. Usually what happens is they’re still in the market…but their price point is lower.”
ATTOM Data Solutions looked at the five recessions that have hit the US since 1980. Only two of those five, the ones in 1990 and 2008, adversely affected home prices. Take a look:
- 1/1980 – Home prices increased +4.5%; GDP decreased -2.2%
- 7/1981-11/1982 – Home prices increased +1.9%; GDP decreased -2.7%
- 7/1990-3/1991 – Home prices decreased -0.4%; GDP decreased -1.4%
- 3/2001-11/2001 – Home p[rices increased +4.8%; GDP decreased -0.3%
- 12/2007-6/2009 – Home prices decreased -13.9%; GDP decreased -5.1%
According to Daryl Blomquist, senior vice president of ATTOM, “Housing is such a basic need that…at least (the housing market) will truck along. It may flatten out a bit, but people still need a place to live and that need…is going to cause the housing market, and particularly home prices, to continue to go up.”
Industry professionals believe the current market appears poised to weather any pending recession. Of course, there are factors that could undermine that belief…a spike in unemployment could negatively impact demand; tariffs on housing materials could make building costs more expensive; tight immigration policy could make the construction industry’s already dire labor shortage even more severe…BUT the Federal Reserve would, odds on, lower interest rates if a recession actually materializes.
Know also that mortgage-lending practices are airtight today unlike the shoddy lending practices in 2007-8.
Ralph McLaughlin, an economist with CoreLogic, said that the real danger to the housing market in the event of a recession would be consumer confidence. “The psychological component, I think, is absolutely the dark horse in what might happen in the next downturn. The more we can provide data out there to help households make more rational decisions (as those decisions relate to the housing market), the better.”