Will Recession Lead To a Drop in Home Prices?

By
Mortgage and Lending with Mortgages in AZ, CA, CO, DE, FL, GA, MD, MN, MT, NC, NJ, NV, OK, OR, PA, SC, SD, TN, TX, UT, VA, WI NMLS #138061 MMCD #1141

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.

Posted by

John Meussner
NMLS ID #138061

It's more than a house - it's home.  So we offer a wide range of mortgage products at competitive prices to help our clients achieve financial security at home.  While we get great feedback on our prices and products, many clients say their favorite part of working with John Meussner & MasonMac is the level of service provided along the way.

Purchase money loans, Refinance, Renovation, Jumbo, FHA, VA, USDA, nonQM, HELOCs, and more

Licensed in
AZ, CA, CO, DE, FL, GA, MD, MT, NC, NJ, NV, OK, OR, PA, SC, TN, TX, UT,
and VA

JMLoans.com

 

(484) 680-4852
Call or Text

Email Me

My Blog

Loan Options

 

Comments (22)

Kat Palmiotti
406-270-3667, kat@thehousekat.com, Broker/REALTOR® - Kalispell, MT
Helping your Montana dreams take root

Good article! Supply and demand are the drivers to whether home prices will go down. Until our real estate markets move to a balanced market, there's no need for price decreases.

Mar 31, 2022 05:11 AM
Brian England
Arizona Focus Realty - Gilbert, AZ
MBA, GRI, REALTOR® Real Estate in East Valley AZ

I hear what "they" are saying but it also seems that we can find someone to tell us what we want to hear no matter what it is that we want to hear, haha.

Mar 31, 2022 07:26 AM
John Meussner

2 sides to every story and then there's the truth : )


Truth is, no one has a crystal ball, but I think my data and forecasts are usually pretty sound.

Mar 31, 2022 02:01 PM
Anna Banana Kruchten CRS, Phoenix Broker
HomeSmart Real Estate BR030809000 - Phoenix, AZ
602-380-4886

John I look at market reports every morning for my area and there is no sign of slowing down or prices going down. In fact it's the opposite. Homes fly off the market as we have a high demand of out of state buyers and very low supply. 

Mar 31, 2022 10:10 AM
Diana Dahlberg
1 Month Realty - Pleasant Prairie, WI
Real Estate in Kenosha, WI since 1994 262-308-3563

From my perspective, I don't see prices going down until the market stabilizes ... we are still experiencing a solid seller's market, low inventory levels, increasing interest, and buyers that are still competing with over-asking offers. Time will tell.  I don't have a crystal ball but that is my humble opinion.

Apr 01, 2022 02:26 PM
John Meussner

I think you're opinion is spot on, Diana.  None of us have a crystal ball, but history and the solid data are all point in one direction - up!

Apr 02, 2022 08:08 PM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning John - this is a well thought our discussion based on historical facts.  Certainly agree that housing caused the problem with the Great Recession.

Apr 02, 2022 03:57 AM
John Meussner

For many younger buyers and owners that was the only recession they've been through that's been tough - but it's important to realize that was not a normal economic ebb & flow situation!

Apr 02, 2022 08:07 PM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Good morning John. Supply and demand is in play here. While demand is high and supply low, prices are not about to decline. Enjoy your day.

Apr 02, 2022 05:16 AM
John Meussner

Spot on, Wayne, thanks for stopping by!

Apr 02, 2022 08:07 PM
Sheri Sperry - MCNE®
Coldwell Banker Realty - Sedona, AZ
(928) 274-7355 ~ YOUR Solutions REALTOR®

Hi John Meussner - Very nice analysis of what is currently happening in the economy.  But the real estate market will continue to stay strong into 2023.

Apr 02, 2022 06:47 AM
John Meussner

Thanks Sheri, I very much agree!

Apr 02, 2022 08:07 PM
Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

Classic supply/demand situation in our market too. We do not see any softening of prices, and with more buyers than sellers, it's not likely we'll see any price reductions at this time. 

Apr 02, 2022 07:54 AM
John Meussner

We're seeing that in a lot of Washington, Debb Janes EcoBroker and Bernie Stea JD  - and most other states as well!

Apr 02, 2022 08:06 PM
Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
The right Charlotte REALTOR!

It's certainly a farce when you hear the media speaking of, #1, A 'bubble' and #2, anything predicting real estate numbers/data, John! They are totally clueless.

As for your post, you are spot-on! I have no idea from where we are going to pull 4,000,000 homes but, I do know, it's going to take a minimum of 2-3 years unless our soil becomes war-ravaged - which I'm confident it isn't!

Apr 02, 2022 08:32 AM
John Meussner

I'm with you 100% Debe!  I see a ceiling, but we're not approaching it yet, especially since so many up and coming markets are just getting started!

Apr 02, 2022 08:06 PM
Mark Don McInnes, Sandpoint-Idaho
Sandpoint Realty LLC - Sandpoint, ID
North Idaho Real Estate - 208-255.6227

Top of the morning John.  Well thought out post with facts and figures.  News and Social Media drives with Fear Headlines and, in my opinion, with no concerns of what really is truth.  Make it a great weekend and hope you are catching a wave from time to time.  Mark

Apr 02, 2022 12:34 PM
John Meussner

Thanks Mark!  I traded waves for trails and moved up to the Sacramento area - but trails aplenty!

Apr 02, 2022 08:05 PM
Sharon Miller
RE/MAX Platinum - Crane Hill, AL

John,

Your analysis is "spot on". There are several factors which support upward valuation of housing regardless of the threat of recession. One item which is often not mentioned, the public's understanding of those factors which dictate housing prices. People "hear" from prognosticators, that our economy is heading towards recession and instantaneously, they assume housing costs will react accordingly. This perception, does have an influence with the "uninformed" segments of our populace. New vehicle sales today are lackluster......there's a limited amount of inventory. Has the price of a new vehicle fallen? The same scenario is now underway with our housing market. Maybe in the coming weeks and months, housing sales may experience some level of decline, but the cost to purchase a home will at the very least, remain steady.  "Bargain hunters" will be confused and then become disenchanted, as their belief the "sky is falling"..... never reaches fruition regarding home prices. 

We live in an environment, where a mindset of fantasy and the make-believe, have overwhelmed a large percentage of our population. As a consequence, this segment of our population places "feeling good" ahead of basic tenets of life, such as  the use of common sense, historical experience and existing societal protocol.

We see this on a reoccurring basis, as an example, a buyer will begin the process of "looking" at property, only to become mired down with minutia. As the "hand-wringing" continues, the amount of confusion and resulting reluctance overwhelms the process.......with the buyer often disappearing. 

I notice in my area, an accelerated level of "high-density" housing construction. This is the result of a heavy influx of national companies......relocating to our "business friendly" environment. As my comment points out, "a rising tide lifts all boats".

Sadly, not much has been published on a frequent basis, to "re-educate" today's consumer.

"It's not the will to win that matters-everyone has that. It's the will to prepare to win that matters."   

                       Coach Paul W. "Bear" Bryant

Apr 03, 2022 09:41 AM
Mimi Foster
Falcon Property Company - Colorado Springs, CO
Voted Colorado Springs Best Realtor

So good to see your post not being of the doomsday variety for real estate this year. I just finished my stats for March, and our average home price in Colorado Springs is up over 15% from last year. I see nothing that indicates there will be any form of depreciation this year. With rising interest rates, the offers may slow down, but we appear to be hale and hearty. Thanks for sharing!

Apr 03, 2022 02:16 PM
John Meussner

Thanks Mimi Foster - Colorado in its entirety appears to be on the uptrend still - there may be some small areas in/around Denver where things got TOO crazy (we had some clients outbid by truly insane offers) and could see some slowing, but overall, not enough houses for all the people wanting to live in your wonderful state!

Apr 04, 2022 08:47 AM
Dorte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear John,

To me, it would actually be pleasant for the market to normalize a little bit. Having 3 offers to compete with when representing an FHA buyer is a lot easier than competing with 90 or 75, like last year. You know there are a couple of cash buyers in there that you just cannot beat, even with the best effort.

Apr 04, 2022 06:24 AM
John Meussner

I agree Dorte Engel , the pendulum is still too far to the sellers side.  Unfortunately, I don't see that changing this year, inventory is going to take a while to catch up.

Apr 04, 2022 08:45 AM
Mike McCann - Nebraska Farm Land Broker
Mike McCann - Broker, Mach1 Realty Farmland Broker-Auctioneer Serving Rural Nebraska - Kearney, NE
Farm Land For Sale 308-627-3700 or 800-241-3940

And then there is ol' Mike.... the guy who believes he will not die of thirst if there is at least one drop of water left in the glass.  What does he think?  Glad you asked...

I think you better get your belt cinched on tight...save more dollars now and get ready for a very bumpy ride over the next 18 months.  And I hope in 18 months I can afford a glass of water and you all are giving me crap for being wrong.

My best advice: If you currently have a 2nd job...keep it or improve on it.

If you are are a part time agent or have struggled to be successful...have a backup plan for earning income and be prepared to act on it. 

No matter what you are doing ... or are successful or not...have a plan for when the market goes on vacation...because it is going to...And here is why:

I believe...and so does my preferred lender...that if the interest rates continue to rise for mortgages...the pendulum will start to swing and once it starts it will swing very fast.   He is concerned we may actually see the highest IR in over 30 years...ouch.

I already am seeing first time buyers having to postpone or simplify their dreams of owning a home.  Once the first buyer is out of the market...the market will fail.

My 26 year old daughter bought a home last year in February, 2021 and her IR is under 3% on a 30 yr conventional.  She hit the perfect time to borrow. That same lender on Oct 1, 2021 was at 3.25% and on last Friday...April 1, 2022...was at 5.25%.

I wish that was a joke...but it is not.

FHA was at 2.875% on 10-1-21 and on 4-1-22 is now at 4.75%

VA was at 2.75% on 10-1-21 and is now at 4.625%. 

Using a Conventional Loan of $220,000 (daughters PP) for 30 yr with 20% down. 

Loan Amount: $176,000

Her current IR%= 2.875  P & I= $730.21/month  Total 30 yr Interest Paid: $86,875.96 

4-1-22 IR%= 5.125      P & I= $958.30/month   Total 30 yr Interest Paid:  $168,985.50

A huge increase of roughly 31% in P & I in ONE YEAR!!  That is not sustainable!!

Plus now dealing with $3.75 to $6.00 gas currently.   Utilities are way up. (Wife works for natural gas company and rates in the Midwest skyrocketed this year).  Groceries are going way up.  The supply chain issues...And then there is blah...blah..blah increases coming!!

That belt I mentioned earlier?  Might need to add a few holes to it as we are going to be on a spending diet in the near future...and that includes caloric intake...(which for me is not all bad)   Until next time... Cash is still King in my world!!

 

Apr 05, 2022 06:51 AM
John Meussner

Mike McCann - Nebraska Farm Land Broker  thanks for such an in depth and well thought out response.  You touch on a great point that's not discussed enough, and that's the cost of EVERYTHING - groceries, gas, the things people NEED, every day.  I do believe the Fed moves will reign in inflation, and a slowing economy will bring it back down to earth.


In terms of housing, the one thing many people fail to recognize (and again, everything is local, everyone's situation is unique, but for the intents of a blog or discussion of broad economics, I use 'median' and 'average' figures) --- wages have increased to a point where the current market, even with increases in rates, is more affordable than MANY other markets we've experienced, in terms of wages and the % of wages a mortgage payment eats up.  That's a saving grace for many home owners and buyers - with wages increasing, they can afford rising rates --- what they CAN'T afford (that would have disastrous long term impacts) is higher mortgage rates WITH higher costs for bread, water, gas, etc.  

Apr 14, 2022 02:31 PM
Robert Rauf
HomeBridge Financial Services (NJ) - Toms River, NJ

I have been discussing this with many of my clients.  While we are all hoping for a soft landing, it may end up being a hard landing to slow inflation down.. and as you said, Every recession in recent history has been good for housing, and recession has never caused real estate to fall.  The exception is the bubble pop of 2007ish, but the recession did not cause that, the bubble pop caused the recession!  

Apr 05, 2022 08:04 AM
Mary Hutchison, SRES, ABR
Better Homes and Gardens Real Estate-Kansas City Homes - Kansas City, MO
Experienced Agent in Kansas City Metro area

Thank you for an informative blog post. Can't predict the market but  I do know that "normal" pp can't buy homes anymore. When you have multiple  investors sucking up smaller  homes to rent them, building homes just to rent them, buying  mobile home parks as investments,  they have one motive: MONEY.  those pp who want to buy, establish roots, family, neighborhoods--so many of them cannot compete in this market.

Apr 05, 2022 08:07 AM
Paddy Deighan MBA JD PhD
http://irstaxdebt.pro - Vail, CO
Paddy Deighan J.D. Ph.D

home prices and oil prices are two commodities that the experts can never agree whether they will rise or fall....arguments run both ways

Apr 05, 2022 11:50 PM
Jan Green - Scottsdale, AZ
Value Added Service, 602-620-2699 - Scottsdale, AZ
HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN

Excellent article! Most forget about the big picture!  It's smart to follow your reports to have indicators of what's to come. Appreciate your in depth views!

Apr 14, 2022 12:18 PM
Jana Holmstrup
Jana Holmstrup - CCO - Kings Mortgage Services, Inc. - Visalia, CA

Thank you, John, for putting my thoughts into an excellent article that I can share with others.

Apr 19, 2022 03:55 PM
Dave Halpern
Dave Halpern Real Estate Agent, Inc., Louisville, KY (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

More price reductions are on the way as long as the war on oil continues to fuel inflation which in turn triggers rising interest rates.

 

If we continue in the direction we're going recession is sure to follow.

Jun 21, 2022 11:08 AM