How Recessions Affect Housing Prices in the US

Will you be ready if housing prices sag again soon?

African-American Man and Woman Studying Papers at a Laptop
•••

 Getty Images

At some point in the future, we can probably expect a recession. Zillow asked a panel of experts when the next recession would likely hit, and half of them said to watch for it in 2020. About 35% of the same experts expect a recession to begin in 2021.

So, when will housing prices drop again? There’s a good chance that we could see some softening in the relatively near future. 

However, even though home prices often fall during a recession, the housing market might not be hit as hard as you might assume. Although there’s no way to predict the future, historical data about U.S. home prices and recessions, along with other factors, can provide some insight into what could be coming next. 

Will Housing Cause the Next Recession?

When many of us think of what caused the Great Recession, which officially happened between December 2007 and June 2009, we remember the housing bubble was a leading factor. While the big 2008 stock market collapse and the failure of Lehman Brothers also stand out, many experts point to the bursting of the property market bubble as the cause of the Great Recession.

“Prior to the downturn, the housing bubble had been driving the economy, pushing residential construction to record levels as a share of GDP,” wrote economist Dean Baker in a paper for the Center for Economic and Policy Research.

Baker pointed out that housing wealth also led to record-low savings levels and a boom in consumer consumption. Once the housing market bubble burst, replacing the consumption driving the economy was practically impossible. Without inflated housing prices, Baker said the financial crisis that led to Lehman’s collapse would have only marginally affected the overall economy.

This time, the housing market is unlikely to be a major driver of the next recession, according to the experts at Zillow. 

Currently, home values are increasing at a sluggish annual pace, so another housing bubble isn’t really an issue. Instead, members of Zillow’s expert panel cite trade policy, geopolitical crises, and a stock market correction as factors more likely to trigger the next recession. The housing market is expected to feel it, though. Already, there have been slowdowns in overall U.S. home value appreciation—although home prices haven’t exactly been on the decline yet.

Housing Prices During a Recession

To figure out when housing prices will drop again, you can look at historical data related to past recessions. Redfin performed an analysis of data from the S&P CoreLogic Case-Shiller Home Price Indices, and compared it with the circumstances surrounding five recent recessions. 

The findings show that, when adjusted for inflation, home prices declined by an average of just 2.7%  encompassing a month before the beginning of each recession through its final month, across the previous five recessions, excluding the Great Recession.

Recession Real Change in Home Prices
1980  -2.6%
1981-82  -5.8%
1990-91  -6.7%
2001  +4.4%
2007-09  -16.7%
S&P CoreLogic Case-Shiller Home Price Indices

When looking at this data, it seems that huge drops in home prices are usually few and far between during a recession. In fact, during the 2001 recession, home prices actually increased. Home prices took a big hit between 2007 and 2009 due to the fact that the Great Recession was largely precipitated by the bursting of the housing market bubble.

In the next recession, though, home prices probably won’t fall as dramatically as they did just over a decade ago.

Don’t Hold Your Breath for Prices to Drop

Realtor.com also reports that the next recession isn’t likely to be accompanied by a crash in home prices. In fact, its analysis is that home building hasn’t been keeping up with demand, partly because of new tariffs on building materials and a construction worker shortage. This means the supply may remain tight enough to cushion the housing market from a steep drop—even if a recession materializes in the next couple of years.

George Ratiu, senior economist for realtor.com, is quoted saying the housing market is in a much better position now, and that home prices are likely to flatten, but probably not fall. Although realtor.com reports on some economists who disagree and think prices will drop, they still only think the impact on home prices will be relatively small.

Zillow’s survey of experts sees similar trends, noting that U.S. median home values are expected to experience annual growth of 4.1% by the end of 2019, with that growth slowing to 2.8% in 2020 and 2.5% in 2021. 

While the housing market is expected to slow in terms of growth, price drops might not present themselves for would-be bargain hunters.

According to realtor.com mortgage rates are another factor. Rates remain near historic lows for 30-year, fixed-rate home loans. If the market continues to enjoy low rates—or if mortgage rates drop further—that could help prop up the housing market.

Where You Live Matters

It’s not just about median home values and overall trends, however. The Redfin analysis avoids looking at the national average, choosing instead to focus on several local markets with what it believes to be the highest and lowest risks of home-price downturn in the next recession. 

Depending on where you want to buy, waiting for the next recession to find a great deal might not bring the advantages you hope for.

For example, Redfin identifies Phoenix, Miami, and Riverside, California, as three major areas that are likely to suffer the sharpest housing price drops during the next recession—regardless of what’s happening in other markets. Other metro areas, though, are likely to be insulated from major housing price drops. Redfin expects that Rochester and Buffalo, in New York, as well as Hartford, Connecticut, will be among the least bruised by housing market drops. 

So Will History Repeat Itself?

There’s no way to predict exactly when the next recession will hit—or what will happen with housing prices when it does come. However, when looking at historical data, it appears that it might not be reasonable to expect huge drops in home prices in the coming recession. In fact, many experts aren’t counting on much of an impact on real estate at all during the next recession. 

If you’re trying to figure out when to buy, rather than holding out for a fire sale, as we saw happen in the Great Recession, you might be better off taking a look at your own financial and life situation, and then making a decision about the right time to buy for you, independent of what’s happening with the economy.

Article Sources

  1. Zillow. "Why the Next Recession is Likely to Happen in 2020, and What It Will Mean for Housing," Accessed Sept. 16, 2019.

  2. National Bureau of Economic Research. "U.S. Business Cycle Expansion and Contractions," Accessed Sept. 16, 2019.

  3. Baker, Dean. Center for Economic and Policy Research. "The Housing Bubble and the Great Recession: Ten Years Later," Page 3, Accessed Oct. 4, 2019.

  4. Redfin. "Rochester, Buffalo and Hartford Least at Risk of a Housing Downturn in Next Recession," Accessed Sept. 16, 2019.

  5. Online Data Robert Shiller, Download "US Home Prices 1890-Present," Accessed Oct. 4, 2019.

  6. realtor.com. "As Recession Fears Rise, Here's the Lowdown for Real Estate," Accessed Sept. 16, 2019.