How Recessions Affect Housing Prices in the US

What will the 2020 recession mean for housing prices?

Red and White For Sale Sign in Yard of Stone and Shingle House.

 fstop 123/Getty Images

The year 2020 was one full significant economic changes in the U.S. Unemployment topped out at a record-breaking 14.8% in April 2020, and the financial markets hit lows not seen in years around the same time.

Will housing prices follow suit? While the 2020 Recession certainly calls to mind the surges of foreclosures and plummeting home prices of 2007 to 2009, it seems this time around may be a bit different for the real estate market.

Housing Prices in a Recession

The U.S. has experienced several recessions over the years, the worst being the Great Recession that transpired in 2007 to 2009. Back then, home prices in most parts of the U.S. plunged, unemployment surged, and many existing homeowners found themselves underwater on their mortgages—or in foreclosure.

The 2007 to 2009 recession was more extreme than others in U.S. history, and it’s not necessarily indicative of how future recessions will pan out. 

Odeta Kushi, deputy chief economist at title insurance company First American, explained it to The Balance via email.

“House prices clearly declined significantly during the Great Recession, but in other modern recessions, house price appreciation hardly skipped a beat, and year-over-year existing-home sales growth barely declined,” Kushi said. “The reality is home prices and existing home sales don’t necessarily decline just because of a recession. In fact, the housing market actually benefits in one specific way during a recession: Monetary policy is usually eased to boost the economy, often leading to falling mortgage rates, which increases consumer homebuying power and makes homes more affordable.”

The Federal Reserve offers a look at how home prices have performed over the last three recessions. The only major downward shift was seen in the Great Recession. Price changes in the 1991 and 2001 recessions were much more muted.

The State of Housing in 2020

When compared with the Great Recession, conditions are different this time around. That might just protect housing (and home prices) from any major collapse. There are few factors that indicate why the housing market might just stay strong.

  • Supply is short and demand is high: There was a glut of housing inventory prior to the Great Recession and construction was booming. That extra supply (plus the wave of foreclosure properties added to it) led to falling prices. This time around, supply is on the opposite end of the spectrum, with the number of listings extremely limited across the country. Couple this with strong buyer demand, and that might just be enough to prop prices up, even during a recession.
  • Lending standards are stricter: Loose credit standards in the early 2000s left many homeowners with mortgages they couldn’t afford, a situation that then disintegrated into surging foreclosures across the country. Lenders have strengthened their qualifying requirements since then (and especially this year), so a similar bottoming-out isn’t so likely.
  • Interest rates are still low: At the start of the Great Recession, mortgage rates hovered over 6%, making it harder for homeowners to pay down their loans and build equity. Though rates have fluctuated much since then, they reached record lows in 2020. Now a few months later, the average 30-year mortgage rate as of Feb. 25, 2021, is 2.97%, according to Freddie Mac.

Experts largely expect housing to weather the storm during this latest recession. Freddie Mac's quarterly forecast released in June 2020 pointed to rising home prices (2.3% across the year and 0.4% in 2021), as well as continued low mortgage rates.

What High Unemployment Means for Home Sales

Rising unemployment is one thing that could pose a problem for the housing market during this recession. For one, it could reduce Americans’ ability to afford a home, thus eating into the demand side of the equation. Additionally, it might make qualifying for mortgage loans more difficult for many buyers.

“Economic hardship, particularly a negative income shock and high unemployment, can diminish the number of potential homebuyers in the market,” Kushi said. “Yet, there is reason to believe that the pool of potential homebuyers may not shrink as much as the jobless claims and unemployment rate may suggest.” 

Additionally, consumer spending, as well as household debt-to-income (DTI) ratios, have been down in recent years, meaning Americans may have more cash to weather the storm.

Construction Slowdown’s Impact on Housing

Construction was booming before the Great Recession. Housing starts hit an almost two-decade high in 2006—just before the economy took a turn for the worst.

Now, new homes are being built at a much slower pace. According to the Census Bureau, building permits, housing starts, and housing completions were all down in April 2020, both compared with March and year over year. Starts were actually down more than a quarter for the month, indicating that these low supply conditions may linger for quite a while (starts typically become completed housing units in about seven months).

If that tight supply does stick around, prices are more likely to keep rising—especially if more potential buyers hit the market. Data from the Mortgage Bankers Association shows new home-purchase mortgage loan activity rose year-over-year in May 2020. Demand could rise even further.

The Bottom Line

The recession will touch every aspect of the economy, and housing is no different. Does that mean another bust is in the cards? Probably not. Home prices may even continue to rise, despite all the bad economic news.

“We clearly saw a decline in home sales this year during the traditional spring homebuying season due to social-distancing measures, but house prices have continued to rise,” Kushi said. “Going forward, we anticipate house prices to continue to rise in the months ahead, while existing home sales may struggle to gain momentum due to the limited inventory of homes available for sale.”