Now They’re Talking About a Recession

How does a recession affect the housing market

What Home Sellers and Buyers Should Know

If you’re getting whiplash from the headlines about the economy, no wonder. Why are we now hearing about a looming recession?

First, the keyword is looming — not immediate. This is not expected to happen for another year and a half or so. Second, it’s not expected to be severe.

Here’s more on what we know so far.

Weren’t We Just Hearing About a “Healthy Economy”?

With help wanted signs everywhere and wages on the rise, financial opportunity has seemed fairly accessible. Headlines heralding a “strong economy” have been all over the news. And now we’re hearing about a recession. What gives?

No matter how strong the economy seems to analysts, ordinary people know their dollars have been rapidly losing buying power for the last two years. This year, analysts had to say it: inflation has reached its highest rate in forty years.

When inflation rises, the federal government starts “tightening” — ratcheting up interest rates to keep prices in check. History shows how hard this is to do without sending the economy into a recession. And although the decision makers at the Federal Reserve think they can gently lower inflation without hurting the jobs market, many economists worry that they can’t. After all, the Fed didn’t think inflation would rise as sharply as it’s rising now.

Granted, federal decision makers are dealing with many question marks. Material shortages are rampant, and now Chinese factories in key cities have suspended operations for public health reasons. It’s hard to say how things like this can play out, given the unpredictability of virus transmission. War and sanctions are other factors impeding the international flow of materials and goods.

Considering all these factors, Deutsche Bank thinks a U.S. recession could very well be evident in late 2023 into early 2024. Goldman Sachs sees a 35% chance of a recession in the same time frame. Fannie Mae, too, just steeply lowered its home sales forecasts to anticipate a mild recession in the second half of 2023.

How Do Economists Know It Will Be a Mild Downturn?

People might hear “recession” and think of the mortgage crisis that unfolded between 2007 and 2009. But that level of severity is not what we’re looking at now. Leading up to the 2008 mortgage default crisis, lenders had issued high-risk mortgages, encouraging too much debt. So people bought. Demand rose, and prices rose. Eventually, this created a real estate bubble.

When the bubble popped, people lost the equity they had in their homes. Many faced crushing debt. Some of the mortgage lenders went out of business; others were bailed out by the government in 2008.

Right now, most homeowners don’t have such risky mortgages. And they’re generally sitting on more home equity, now that real estate has seen price surges across the country. So it’s not likely that we’re headed into a serious downturn.

Now we’ll take a look at what a recession, even a mild one, could mean for people at either end of the home purchase.

Does Talk of a Recession Mean the Seller’s Market Will Fizzle?

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Sellers have local factors, so there’s no way to generalize how the current seller’s market will change. That said, next year’s sellers are unlikely to see the frenzied bidding wars that have peppered the market over the past two years. It’ll take more time for many homes to sell. Why?

As of April 2022, Fannie Mae economists are noting that the interest rates on home loans have shot up to 5%. Buyers are expected to balk at rates above 5%, especially if they think homes are overpriced. Buyers’ growing concerns will almost certainly put a damper on the current seller’s market for the remainder of 2022.

Then, in 2023, Fannie Mae anticipates a real dip in the market, with the number of home purchases down nearly 10%. (This is a big deal, as Fannie Mae earlier predicted a 2.7% decline in home sales next year.)

So, with buyer interest cooling, home prices will no longer be rising at a record-breaking pace.

What Does This Mean for Frustrated Home Buyers? And Will Mortgages Be Easier or Harder to Get?

All of the above suggests that hopeful buyers who’ve been sidelined but still want to buy a home could finally buy in. That said, there will still be plenty of tests for buyers’ patience as they navigate the cooldown, because:

  • Supply chain bottlenecks continue to impact the market. Global instability and public health threats just won’t stop, and they keep dragging delays out and making materials costlier. Home builders and renovators are struggling to meet demand. This means there are still too many people competing for a finite number of homes.
  • Some people who might otherwise be selling and moving are unwilling to give up their current homes or mortgages. This is the case for many who bought their homes in 2020 or 2021, and benefited from remarkably low interest rates on their 30-year, fixed rate home loans. “Why give up a 3% mortgage to sell,” lots of homeowners will be asking themselves for the next 28 years.
  • Banks that fear defaults are less likely to approve mortgages. And Fannie May’s warning of a cooldown will be a cause for concern among lenders. If homeowners have a hard time building equity, they can become overburdened with debt. Lenders must, by law, try to avoid that risk. In short: mortgage approvals aren’t going to be any easier to get.
  • Lenders tend to be especially cautious when vetting the buyer’s potential new home, too, during a recession. Does the seller have debt on the house? Title issues involving liens are more common during times of economic stress.

Pro tip: Mortgage borrowers have to buy title insurance for the lenders. It can be wise to pay a one-time premium at closing to have an owner’s title policy as well. Read more about what sorts of issues an owner’s policy can potentially solve.

  • While fewer people might be able to buy, those who do buy could face competition from investment companies with access to piles of capital. puts it bluntly: “These companies know that prices are lower during a recession, and they are there to make a profit.”

In any case, the general rule is that demand sinks during a recession. Lower demand can mean certain buyer-friendly trends. For example, buyers can actually pay the asking price and not have to outbid others. Buyers will no longer be pressed to waive contingencies in their purchase contracts. When the real estate market cools enough, buyers can even get breaks from sellers, who might cover closing costs to ensure a sale.

Another hallmark of a recession, even a mild one, is also good for buyers. The government will stop pushing up its interest rates, and lenders will follow that lead. So, as we head in the general direction of a market cooldown, we can expect a change in the mood of the market in the months to come.

Supporting References

Fannie Mae Housing Forecast: Economic Growth Forecast Downgraded as “Soft Landing” Appears Increasingly Unlikely (Apr. 19,2022).

Ben Casselman for The New York Times: The U.S. Economy Is Booming. So Why Are Economists Worrying About a Recession? (Apr. 5, 2022). Posthaste — Deutsche Bank Was the First to Call a Recession (Apr. 11, 2022).

Herb Scribner for There’s a 35% Chance of a U.S. Recession in the Next Two Years, Goldman Sachs Says (Apr. 19, 2022). 

Cody Tromler for Thinking About Buying a House During a Recession?

Matt Carter for “Modest Recession” Eyed in 2023, Fannie Mae Economists Predict (Apr. 19, 2022).

And as linked.

Photo credits: Cottonbro, via Pexels.