Amidst worries of a looming recession due to inflation and ongoing supply chain issues, many consumers and investors are wondering what a potential economic downturn could mean for the housing market. Understanding the impact of business cycles on housing is an important context for homeowners, buyers, sellers, and real estate investors.
A Recession Slows Down The Housing Market
During an economic recession, the housing market is usually one of the first sectors to slow down. As companies lay off workers and reduce hours, many people find their income decreasing or uncertain. This makes them reluctant to make a major purchase like a house. Additionally, lending standards tighten during recessions, making it more difficult for many to qualify for a mortgage. These factors combine to slow down home sales and reduce prices in most real estate markets.
Lower Home Sales And Dropping Prices
When a recession begins, home sales start declining quickly. People become worried about their job security and income, so they avoid buying a house. This drop in demand causes home prices to fall in most areas. Sellers have to lower their prices to attract the fewer buyers that remain in the market. The falling home values also make some owners unwilling to sell their house for less than what they believe it is worth. This further reduces the number of homes available for sale.
The severity of the drop in sales and prices depends on the depth of the recession and other factors like interest rates. In a mild recession, real estate markets may continue growing slightly or stabilize. In a more serious downturn, sales can fall by 10% or more and prices may decline 5-10% on average. Local markets that experienced a big boom before the recession tend to see the largest drops. The decreases usually continue for 6-18 months until the economy starts recovering.
Investing In Real Estate During A Recession
For investors, a recession can actually create opportunities in the real estate market. As prices drop, properties become more affordable, and the potential returns on investment rise. Investors may be able to find bargains on both residential and commercial properties during a recession. However, the risks of investing in real estate during a recession are also higher because it may take years for values and rents to recover and return to pre-recession levels. Investors need to carefully evaluate the location and long-term prospects of any property before purchasing during an economic downturn.
Recovery Follows The Overall Economy
The real estate market recovery typically lags behind the general economic recovery by 6-18 months. As the recession comes to an end and job growth starts picking up again, buyers slowly return to the housing market. However, they remain cautious at first, waiting to see if the improvement in the economy will last. Home sales stabilize and start rising, reducing the inventory of homes available for sale. Prices usually remain flat during this time.
If the economic expansion continues, the real estate recovery gains momentum. Buyer demand and sales strengthen, putting upward pressure on home prices. Values start rising again, although usually at a moderate pace. Sellers also become more active in listing their properties. The recovery in the real estate market may take 2-3 years or more to fully develop, with sales and prices returning to pre-recession levels. Local markets that were hardest hit during the downturn often take the longest to bounce back.
To Wrap Up
A recession usually brings a slowdown to real estate markets that can last 6-18 months or more. Home sales decline, inventory rises, and prices drop. For investors, a recession creates opportunities to purchase property at lower costs, although risks are higher. The real estate market recovery depends on and follows the overall economic recovery, which can take 2-3 years to fully regain momentum. With improving job growth and economic activity, the housing sector comes back to life, and real estate returns to a growth market again.
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