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Why the Value of Your Home Shouldn’t Crash in a Recession (If One Comes)
By Aly J. Yale MONEY RESEARCH COLLECTIVE
As recessionary fears grow, so does concern about home values — especially considering what happened in the last major recession.
A survey of economists by the Financial Times shows that 70% expect a recession sometime in 2023 — largely due to skyrocketing inflation and the actions the Federal Reserve will need to take to tame it. A housing bubble, though, probably isn’t in the cards, most say.
That’s because home values usually hold steady during recessionary periods — at least historically speaking. As Mark Fleming, chief economist at First American Financial Corporation, explains, “House prices tend to flatten but not decline.”
Of course, the real estate market during the Great Recession was a notable exception. During that period, the median sale price fell from $238,400 in 2007 to $214,300 by mid-2009. In the Miami area, the drop was even bigger — from $330,800 to $199,540.
Economists aren’t predicting a similar housing market crash or the reappearance of those plummeting prices anytime soon. In fact. if a recession does rear its head, most expect it will be mild, with few — if any — major impacts on real estate.
“It would continue to contribute to maybe fewer sales,” says Brad O’Connor, chief economist at Florida Realtors. The Federal Reserve would likely move to lower interest rates, too, he says. “So, that actually might help the housing market.”
What’s behind that prediction, and why aren’t we likely to see a huge dip in home prices if we enter a recession? Experts say it has a lot to do with the conditions of this real estate market — and how starkly different they are from the one seen over a decade ago.
What makes this housing market different?
The Great Recession was a unique scenario — particularly since it coincided with the collapse of many major financial institutions and a stock market crash.
“If we go back to the Great Recession, that was an anomaly,” O’Connor says. “You rarely get a recession that is caused by a complete meltdown of your financial system.”
Ultimately, today’s housing market is just very different from the one that crashed during the recession of 2008, and stricter mortgage lending standards are a big part of that.
Back then, poor lending practices and a high share of subprime loans were big contributors to the crash. According to O’Connor, many lenders approved borrowers without even verifying their credit score, income or job.
This created a major problem when the economy slid into a recession. Borrowers were laid off, and because their finances weren’t properly vetted, they fell behind on their mortgages. Eventually, that led to a wave of foreclosures, and banks were forced to sell homes at steep discounts, causing a glut of supply and steep dip in home values.
Today, mortgage lenders are more careful about who they approve.
“The vast majority of loans for the last several years have been plain-vanilla, fixed-rate, fully-amortizing mortgages to people with rather high credit scores, whose income has actually been verified and who can show that they can afford their monthly payments,” says Jeff Tucker, senior economist at Zillow. “We don’t have that kind of ticking time bomb of people who are going to start to default on mortgages because of this changing payments or homes they can’t afford.”
On top of this, homeowners have a lot of protection should things go south. The average homeowner now has over $200,000 in home equity — and in Miami, it’s $313,000. That means owners who do get laid off have options to avoid going into default.
“Say they did lose their job and needed to sell,” says Molly Boesel, chief economist at property data provider CoreLogic. “While that’s a really unfortunate event, they most likely could sell their home and wouldn’t need to go into default.”
Unemployment and rising interest rates: Threats?
One thing to watch is the country’s unemployment rate. If unemployment rises, it could make it harder for homeowners to make their mortgage payments. In some markets, this could result in foreclosures and quick sell-offs, thus increasing the housing supply.
A major surge in unemployment isn’t too likely, though — at least looking at current numbers. National unemployment is at 3.6%, hovering around the lowest rate the country’s seen in years. And in Miami, it’s a mere 2.3%. (During the Great Recession, it got up to 10%).
“We still don’t have a wave of layoffs, and that unemployment rate is still very, very low,” says Tucker. “At the moment, there’s not much cause for concern on that front.”
Mortgage rates are another number to keep on your radar. Though most expect rates to keep rising in the coming months, if we do get hit with a recession, they could decrease in order to promote borrowing and quell the declining economy.
For now, real estate agent Paulina Hurtado says new home buyers should view their initial interest rates as temporary and have a plan to refinance down the road, when rates eventually come down.
“Marry the house, and date the rate,” says Hurtado, who’s with Century 21 Global Connections Realty in Broward County. “Buy the property you’re in love with now — and yes, you’re going to get a higher rate. If we hit a recession, most people will be able to refinance and lower their monthly payment.”
