Will Recession Lead To a Drop in Home Prices?
Recession is starting to show it's ugly face in the US - at least in media headlines. One of the biggest reasons is that a historical indicator of pending recession is upon us - the flattening of the yield curve. "Yield curve flattening" is a pretty simple concept - it occurs when the yield between short and long term treasury bill prices disappears, making the cost and return of short and long term investments identical, or inverted. Yield curve inversion occurs frequently in environments where the Fed is raising rates and tightening intra-bank lending.
Historically, a shrinking yield curve, and more indicative, a yield curve inversion (which we saw briefly yesterday for the first time in a long time), is a precursor to recession without fail since the 1980s, as you can see in this graphic. Gray shaded vertical bars represent periods of recession, and the red part of the graph are time periods the yield curve was inverted. As you can see, we're almost there in the current market.
So the yield curve is flattening and nearing inversion, and we can see historically this is a recession indicator - so how does this relate to home values?
There's some concern that with recession, we may see home values plummet, because the last time we faced a major (non-COVID-induced) recession, it was the 'Great Recession' triggered by the bursting of the real estate bubble of the early 2000s. However, if we take a broader look into the markets and the current environment, along with a historical perspective, the housing picture looks a lot brighter for buyers and home owners.
In fact, historically, housing is one of the places that does well in recessions. It can (and in my opinion, should) be argued that housing issues CAUSED the last recession, instead of an often discussed narrative that housing dipped DUE TO recession. Historically, home values remain stable or continue to climb in periods of recession, as you can see here:
In our current market, there's a gap between the demand for housing and the supply by about 4 MILLION HOMES. In 2006, there was an inverse relationship, where demand was short and supply was sky high, with many builders creating a glut of housing supply with no buyers to be found. In today's market of bidding wars, multiple offers, and homes selling in days, not weeks, we have the opposite challenge, and an environment that bodes well for home values, even in the face of recession.
It's important to note the media often misses the mark when it comes to forecasting home price movements, and recession is often discussed only in negative light - and while a slowing economy and the impact on jobs, wages, and livelihoods is very real and negative, home prices are often a bright spot and silver lining. While recession may very well be on the way in the not so distant future, drops in home values are not likely to be on the horizon any time soon. In fact, home values are expected to continue to climb through 2022, so buyers would be smart to act quickly, and home owners should take comfort in knowing they have not only a home, but an asset expected to appreciate for the foreseeable future.
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