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The Impact of Recessions on Housing and Real Estate

A recession can slow the housing market and may be a bad time to sell. If you can buy, however, you may be in for a treat.

Written by Casey Bond / July 1, 2022

Quick Bites

  • Recessions occur when our economy slows down considerably for an extended amount of time.
  • Housing prices can drop as fewer people are prone to buying in down times.
  • It may not be a great time to sell for many of us, but for some, it could make sense.

Buying a house is one of the biggest financial moves you can make. Much of your wealth gets tied up in your home. And you have to diligently make mortgage payments month after month for many years, or risk losing everything. Unfortunately, a recession can threaten your financial security and home.

The truth is that many homeowners weather recessions with no problem. Recessions are a cyclical part of the economy and can be expected. However, recessions do have significant and sometimes dire consequences for the housing market. Here’s what you should know about recessions and their impact on housing and real estate.

Inside this article

  1. What's a recession?
  2. The impact on real estate
  3. Time to buy a home?
  4. Time to sell?
  5. The 2007-2009 recession and hous

What's a recession?

A recession is a significant decline in economic activity that lasts more than a few months, according to the nonprofit research organization National Bureau of Economic Research (NBER). Signs of slowdown come in gross domestic product (GDP, or the value of goods and services produced in a country), income, employment, industrial production and wholesale-retail sales. The NBER is responsible for officially marking the official beginning and end of recessions.[1]

Recessions can happen for various reasons, including major shocks to the economy. For instance, the dotcom bubble of the 90s eventually burst, resulting in a recession during the early 2000s.[2] The most recent recession happened thanks to the coronavirus pandemic, which caused businesses and economies to shut down around the world.[3] It was was also the shortest recession to date.

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How does a recession impact real estate?

Recessions usually have a major impact on the housing market and real estate. When the economy is doing poorly, it may mean that fewer people have the money to buy homes. With supply higher than demand, property may stay on the market much longer and home values fall to encourage sales. Overall, the market can stagnate. If people are unable to pay their loans, the rate of mortgage delinquencies and foreclosures can also increase.

To harness a recession, the Federal Reserve, the U.S. central bank that is responsible for keeping the country’s economy on track and setting monetary policy, steps in.[4] To spur economic activity and encourage homebuying, it will often lower interest rates.

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That’s great news for anyone who wants to borrow money; lower rates make it possible to borrow more at a smaller cost over time. It’s not great news for savers, who will see minimal interest earnings on deposits in savings accounts, certificates of deposit and money market accounts.

Should you buy a home during a recession?

“Generally speaking, if you can afford to buy a home during a recession, you should,” says Ralph DiBugnara, president of Home Qualified, a real estate guide.

With homes in less demand, prices should come down. Additionally, because the Fed is probably lowering interest rates to stimulate the economy, you are probably going to get cheaper mortgages.

Photo of Ralph DiBugnara

Meet the Expert

Ralph DiBugnara, president of Home Qualified, a real estate guide.

Prospective buyers should keep in mind that buying property during a recession can be risky if your income isn’t solid. It’s common for businesses to lay off workers or reduce hours during a recession, so it’s only a good time to buy if you’re sure that your income can support a mortgage payment.

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Or is it time to sell?

A recession is not necessarily a good time to sell real estate, depending on at what price you bought your home, according to DiBugnara. If you bought it eons ago and prices are still significantly higher–if relatively lower in the shorter term–you could still do well. But if you bought more recently, you could see a smaller profit, or even have to take a loss by selling when home values are depressed.

That said, if you can sell and buy another property easily, or use the proceeds to invest, selling could be a good option, DiBugnara says. “It would be a smart move to take some money off the table and put the cash from selling your home toward other depreciated assets, especially during a recessive period.”

The 2007-2009 recession and housing

The Great Recession, which took place from December 2007 to June 2009, happened because of the housing market.[5] Housing prices rose rapidly during the mid-1990s through mid-2000s, with the median home price shooting up from $207,000 to $314,000 from 2000 to 2007.

Why, you might ask? Lenders started giving mortgages to high-risk individuals, who normally wouldn’t qualify for loans. Those lenders then repackaged the loans, which were then sold off looking a lot less risky than they really were.

Many of those who took on mortgages ended up being unable to pay. Subprime lenders started filing for bankruptcy or closed, the demand for housing collapsed because there were no more high-risk mortgages available, and the price of homes slumped. Even lower-risk mortgages were harder to find as banks became more cautious.

Foreclosures increased, repossessions multiplied and the number of homes being sold into the weakened housing market increased. Home values plummeted as interest rates increased and many homeowners were no longer able to afford their loans. In many cases, homeowners were better off walking away from their loans and foreclosing rather than making high payments on homes that were worth less than what they owed.

Hundreds of banks that were heavily invested in subprime mortgages and mortgage-backed securities ultimately failed as well. Between 2008 and 2015, more than 500 banks shut down.[6]

Eventually, the housing market and economy as a whole recovered. But the Great Recession was a great lesson to consumers and lenders alike on the dangers of overextending financially to own property.[7]

Article Sources
  1. “Business Cycle Dating Committee Announcement January 7, 2008.” National Bureau of Economic Research. Jan. 7, 2008. https://www.nber.org/news/business-cycle-dating-committee-announcement-january-7-2008.
  2. “Dotcom Bubble.” Corporate Finance Institute. Jan. 21, 2022. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/dotcom-bubble/
  3. “Business Cycle Dating Committee Announcement July 19, 2021.” NBER. July 19, 2021. https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021#:~:text=The%20previous%20peak%20in%20economic,entered%20a%20recession%20or%20expansion.
  4. Council on Foreign Relations. “What Is the U.S. Federal Reserve?” https://www.cfr.org/backgrounder/what-us-federal-reserve.
  5. “Housing and the Great Recession.” Furman Center. October 2012. https://furmancenter.org/files/publications/HousingandtheGreatRecession.pdf
  6. Federal Reserve Bank of Cleveland, “The Crisis, the Fallout, the Change: The Great Recession in Retrospect,” December 18, 2017, https://www.clevelandfed.org/newsroom-and-events/multimedia-storytelling/recession-retrospective.aspx.
  7. “Subprime Mortgage Crisis.” Federal Reserve History. https://www.federalreservehistory.org/essays/subprime-mortgage-crisis

About the Author

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Casey Bond

Casey Bond is an award-winning writer who has been covering personal finance for more than a decade. Her work has also appeared on Yahoo!, Money.com, Fortune, MSN, Business Insider, The Motley Fool, U.S. News & World Report, Forbes, TheStreet, and more. She is a Certified Personal Finance Counselor.

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