What goes up must come down — even if it takes a while.
The Federal Reserve’s attempts to cool inflation have yet to bring the economy to equilibrium. As it approaches a likely downturn, experts predict a recession could hit the US within the next 12 months.
In the past, recessions have led to home price declines in the real estate market. This was the case in the mid-2000s, when a bursting housing bubble contributed to a global recession that triggered rapid home price declines in the US.
However, each recession behaves differently.
Rewinding back to the dot-com recession of 2001 — a time when massive investment in the tech space led to a crash in the stock market — home prices did not tank. Instead, the mild downturn left the housing market relatively unscathed.
Daryl Fairweather, the chief economist at Redfin, told Insider that if the economy does have a recession by 2023, home prices won’t fall as sharply as they did during the mid-2000s. Instead, Americans are likely to see a decline of less than zero to 4% — if they don’t stay flat completely.
“The likelihood of the US entering a recession late this year or in 2023 has increased over the last few months,” Fairweather said in a statement. “But even if there is a recession, the housing market looks resilient.”
Fairweather says if there was to be recession, it would not be as devastating as the one that preceded it. “I don’t think it will ever be as bad as the Great recession,” she said. “This recession will be caused by global forces of inflation.”
Spurred on by attempts to curb the economic impacts of the Covid-19 pandemic, inflation has become a global crisis. In America it has sent gas prices to near record highs while surging food costs to unaffordable levels. In the US housing market, it has increased mortgage rates as well as worsened a supply and demand imbalance that has driven up home prices.
“When the Fed raises interest rates to slow inflation, it hurts borrowers,” Fairweather said in a statement. “Higher interest rates make it more expensive to borrow to buy a home, buy a car, or finance higher education.”
Historically, higher housing costs have lowered demand, eventually bringing prices back to earth. However, the real estate market’s current lack of supply is keeping prices high — even as buyer demand wanes.
According to Redfin, homebuyer competition dropped to a 15-month low in May, yet home prices were up 14.7% year-over-year. “We are at the beginning of the downswing of the housing market cycle, but long term trends that have constricted the supply will keep buying a home — especially with a mortgage — unaffordable through the cool down,” Fairweather said.
So even if the US were to enter a recession, notable home price depreciation will take some time — which means affordability will continue to be a concern for homebuyers.
“Home prices will decline year over year if there’s a recession, and they’ll decline from their peak even if we don’t enter a recession,” Fairweather said. “But prices aren’t likely to fall below pre-pandemic levels nationwide.”
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