How are Real Estate Values Affected During a Recession?

The media has been sounding the alarms on a potential recession this year for 2022, which has many questioning if it’s a good time to purchase a home.  When people hear about recessions, most remember the sharp decline in home prices during the housing bubble and "Great Recession" (December 2007-June 2009).  Many often mistakenly believe that the recession caused the housing bubble, but it was quite the opposite – the housing bubble led the U.S. into a recession.

What Does History Tell Us About Recessions and Real Estate Values?

Looking back at the other eight recessions since 1960, surprisingly, home values significantly increased or at least remained stable each time during and after the recession.  One of the reasons this occurs is because interest rates significantly fall during recessionary periods.

During the housing bubble, risky, non-verified mortgages were commonplace.  There was a glut of supply in the real estate market along with much lower buyer demand.  As a matter of fact, there would be over 1,000 foreclosures listed for sale in Forsyth County (NC) alone.  Now, there are currently TEN in the entire Triad MLS (one in Forsyth County), so it's a totally different market today. 

Not to say we won't see more foreclosures this year, because there are a number of homeowners behind on their mortgages due to Covid-19, but their homes have also appreciated, so they aren't under water like they were during the housing bubble.  In the Clemmons area, home values have appreciated approximately 30% over the last 3 years.

Today’s housing market is much stronger – there are 3 million fewer homes for sale compared to the housing bubble, and 14 million more households.  Once again, that is true in the Triad area with only 1,057 active listings on the Triad MLS. Strong demand and tight supply should continue to be supportive of home values.

Recession Indicators - Inverted Yield Curve, FED Rate Hikes

The yield spread between the 10-year Treasury and 2-year Treasury has been trending lower and has recently inverted for brief periods. Why is this significant?

Normally, you would expect to receive a higher rate of return for putting your money away for 10 years versus 2 years. But when there is an economic slowdown and fear in the markets, the yield curve can go inverted – meaning that 2-year yields are higher than 10-year yields, which is backwards or upside down. Looking back at the history of recessions, we almost always see a recession follow an inverted yield curve but it doesn’t happen right away. It could take months to a year or two for the actual recession to occur.

When the FED hikes the FED Funds Rate, this causes short-term yields to rise and can cause long-term yields to fall if it’s perceived that the rate hikes are getting inflation under control. Remember, the Fed hiked its benchmark Federal Funds Rate by 25 basis points at its March meeting.

Fed members are expecting six additional hikes this year according to their dot plot chart, with a 50 basis point hike expected in May. The spread between the 10-year and 2-year should continue to narrow and invert as the Fed hikes the Fed Funds Rate, and again this inversion has been a reliable recession indicator.

Note that while a recession is not a great thing for the economy, one positive aspect is that periods of recession are always coupled with lower interest rates.

Should I Be Concerned About Buying a Home During a Recession or Threat of a Recession?

When "recession" is mentioned, many home buyers begin to feel nervous.  They wonder if the home they are considering to buy will go down in value.  That is understandable given what happened during the Great Recession and last housing bubble.  As we have stated, this market is totally different than that.  And over the last 60 years, home prices have remained stable or increased during recessions.  Given the low rates of return in traditional safe investment vehicles, the tight supply and high demand for housing, real estate is a great option to consider if a recession comes upon us this year.  Additionally, with North Carolina being a popular state for transplants, and the Lewisville-Clemmons area being in high demand, it's another solid reason to consider buying a home at this time.