Are we heading into a recession? How will this affect house prices?

First and foremost, a recession does not equal a housing crisis or home price depreciation. Everywhere you look, experts are warning we could be heading toward a recession, and if true, an economic slowdown doesn’t mean homes will lose value.

What's a Recession: 

“A recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators.” A recession is characterized by a decline or loss of Gross Domestic Product (GDP) for two consecutive quarters. “A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”

What provoked previous recessions:

1980 and 1981 - Energy Crisis Recession. 

What triggered it: The recession was triggered by tight monetary policy in an effort to fight mounting inflation. The recession was made worse by a global energy crisis as a new regime in Iran decreased oil production, rising oil prices. 

The effects: an unemployment spike of close to 11%.

How long did it last: 16 months

1990- 1991 - also known as the Gulf War Recession. 

What triggered it: The Federal reserve had been slowly raising interest rates for 2 years, slowing down the economy. When Iraq invaded Kuwait in August 1990, plus the US’ involvement in the war, oil prices increased to more than double, making matters worse for the economy.

The effects: this recession was characterized by a sluggish employment recovery, unemployment was widespread across several industries and reached a high close to 7% in the US. 

How long did it last: The recession lasted about 8 months.

2001 - Dot-com Recession. 

What triggered it: The Nasdaq lost more than 75% of its value, leaving the economy vulnerable. The 9/11 attacks as well as a series of accounting scandals at major U.S. corporations lead to s stock market crash. 

The effects: An unemployment rate of 5.5%.

How long did it last: 8 months

2007 to 2009 - The Great Recession, and perhaps the most vivid in people’s minds. 

What triggered it: The recession happened due to a subprime mortgage crisis, with a foreclosure rate of 79%, causing home prices to plummet, leading to a banking crisis on banks that had taken on high-risk mortgage-backed securities, which in turn led to a stock market crash.

The effects: The largest GDP drop since World War II, was accompanied by unemployment rates that reached 10% and required large government stimulus (bailouts) to turn the economy around. 

How long did it last: 18 months

2020 - Covid/Pandemic Recession - the shortest recession on record. 

What triggered it: A global outbreak/Pandemic caused by COVID-19. Which lead to the closing down of businesses and the ceasing of economic activity to control the spread. The magnitude and speed of job losses are what make it qualify as a recession.

The effects:  22 million jobs disappeared from companies, forcing the government to step in with massive relief packages for companies and citizens.

How long did it last: 2 months

What’s expected: 

There are several factors on a global scale that are leading economists and experts to believe we are heading into a recession. As we’ve seen in the last 6 recessions, the FED has a way to regulate inflation - Interest Rates. This has been a great tool in controlling inflation and preventing the economy to spiral out of control. Think of it as a type of Shock Therapy or having to use a defibrillator to shock a heart back into a normal rhythm.

Current Global Instability: Russian invasion of Ukraine, Chinese Tariffs, Taiwan and China, and global supply chain issues.

The Good News:

Historically how have recessions affected the real estate market: In 4 of the 6 recessions, housing prices have gone up. 

If a recession is imminent, should we worry? 

In my humble opinion, if a recession does happen, the best way to prepare is to tighten our finances, have a larger amount of reserves, and be lean enough to be able to pivot. 

One of the most important things to remember is that after every recession, the economy goes back to normal, and is followed by months of expansion: 

Bottom Line for Real Estate

We’re not in a recession in this country, but if one is coming, it doesn’t mean homes will lose value. History proves a recession doesn’t equal a housing crisis. A home is one of the most secure investments you can make and there are often more protections for your primary home than a rental. 

Some advice for buyers: 

1. Buy a home that you can afford to make the monthly payments for. A good and reputable lender will be invaluable.

2. Buy a home that you will be happy in. Seems simple, but the reality is you shouldn’t buy just to buy. Buy something that makes sense for you and your family.

3. Buy a home that you see yourself staying in or keeping for the next 8 to 10 years. All markets are cyclical, and many times the benefits of purchasing outweigh the benefits of renting. We are however subject to those market cycles, studies show that the best returns are seen when you hold properties for that period of time.