{"id":16746,"date":"2020-05-21T14:44:00","date_gmt":"2020-05-21T21:44:00","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=16746"},"modified":"2024-03-31T09:33:10","modified_gmt":"2024-03-31T16:33:10","slug":"what-happens-to-house-prices-in-a-recession","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/what-happens-to-house-prices-in-a-recession\/","title":{"rendered":"Rise, Fall, or Stay Level: What Happens to House Prices in a Recession?"},"content":{"rendered":"

A looming recession, such as the one we\u2019re facing now on the heels of COVID-19<\/a>, brings a great deal of worry and no shortage of questions. You might be wondering about the stability of your job, the state of your investments and \u2014 if you\u2019re a homeowner \u2014 the impact on the value and price of your property. That\u2019s especially true if you\u2019ve been considering selling<\/a> your home anytime soon.<\/p>\n

By definition<\/a>, a recession is a \u201csignificant decline in general economic activity in a designated region,\u201d marked by a drop in employment, income, retail sales, production and the gross national product (GDP) \u2014 and so it seems like a given that home prices would naturally drop in response.<\/p>\n

\u201cIn a recession, more people are unemployed and cannot pay their mortgages,\u201d says Tenpao Lee, Ph.D.<\/a>, a professor of economics at Niagara University<\/a>. \u201cTherefore, in a recession, the demand for a home will decline and the supply for a home will increase. Home prices will inevitably decline.\u201d<\/p>\n

But the reality is that every recession is different and every homeowner\u2019s situation is unique \u2014 which means the effects on home prices can vary widely across markets.<\/p>\n

\"\"<\/a>
<\/a> Source: (Andy Dean Photography \/ Shutterstock)<\/figcaption><\/figure>\n

How past recessions impacted housing prices<\/h2>\n

Every recession has unique variables that make it different from the last one, notes Owen Dashner<\/a>, a real estate investor and partner with Red Ladder Property Solutions<\/a>. Prior to the current \u201cpandemic recession\u201d we\u2019re approaching (or already in the midst of), the most recent economic contraction was the Great Recession<\/a>, which lasted from December of 2007 until June of 2009.<\/p>\n

Great Recession pummeled prices<\/h3>\n

After a decade of steadily rising home prices \u2014 from the average price of $207,000 in 2000 to $314,000 in 2007 \u2014 the housing bubble finally burst in 2007. The inflated home prices and spike in subprime mortgages combined to trigger the biggest housing market crash<\/a> in modern history. Unemployment spiked to 10%<\/a> as of October 2009, and the GDP (gross national product) fell by more than 5%.<\/p>\n

\u201cIn The Great Recession, the subprime mortgage market had a big hand in bringing the economy and the housing market to its knees,\u201d says Dashner. \u201cIn the aftermath, many home builders were crushed. Over the past decade, the pause in home building led to an undersupply of housing, especially starter homes, which has in turn led to high demand and increased pricing that we\u2019ve maintained until this year.\u201d<\/p>\n

Mike Graf<\/a>, a top real estate agent in Cedar Rapids, Iowa, was selling homes during the Great Recession, and remembers the impact well. \u201cIt had a substantial effect on the market \u2014 we saw home prices drop by 10-12%,\u201d he recalls. \u201cIt took 10 years for the market to recover.\u201d<\/p>\n

Prices fared better in shorter recessions<\/h3>\n

But it\u2019s important to remember that the Great Recession was centered in the real estate market, and not every economic decline has such a dramatic impact on home prices. Max Kimmel<\/a>, owner of One Shot Finance, points out that during the two mini-recessions in the 1980s, housing prices actually increased \u2014 and the 2001 recession<\/a> saw similar trends.<\/p>\n

In fact, according to data from ATTOM Data Solutions, throughout all five of the recessions that have occurred since 1980, there were only two instances<\/a> when home prices decreased, in 1990 and 2008.<\/p>\n

\u201cThe Great Depression<\/a> [of the 1930s] saw a 25% average decrease in home prices, but that was mostly due to the large number of foreclosures \u2014 and with much stronger regulations nowadays, that isn’t likely to happen again,\u201d Kimmel says.<\/p>\n

Dennis Shirshikov, a senior economic analyst for FitSmallBusiness.com, agrees that not all economic declines will leave the housing market battered and bruised. \u201cOther recessions saw home prices decline significantly at the highest price points, but left most homes declining at a moderate amount of under 10%,\u201d he says.<\/p>\n

Most of the real estate agents and finance experts we spoke with agree that the current COVID-19-triggered recession isn\u2019t likely to have the same devastating impact on the housing market as the Great Recession.<\/p>\n

\u201cDamage to housing will probably not be as bad as the Great Recession, as the pandemic is a non-economic factor and the economy is fundamentally healthy,\u201d notes Lee.<\/p>\n

\"A<\/a>
<\/a> Source: (S&P Dow Jones Indices, LLC)<\/figcaption><\/figure>\n

Are some housing markets more vulnerable to recessions?<\/h2>\n

The short answer is yes. Here\u2019s how a recession impacts different types of housing markets \u2014 and different types of properties \u2014 in unique ways.<\/p>\n

Low vs. high price points<\/h3>\n

Generally speaking, upper-end property values are more affected by economic dips, says Curt Stinson<\/a>, a real estate agent based in Tucson, Arizona. That\u2019s because higher-net-worth homeowners are much more portfolio-sensitive.<\/p>\n

\u201cWhen the stock market and investment portfolios drop drastically, that affects the upper end more,\u201d Stinson says. \u201cOn the other hand, homeowners on the lower end are more interest rate-sensitive.\u201d<\/p>\n

Graf agrees that higher-priced listings are harder-hit. In his Iowa market, he sees the greatest impact on properties priced at $400,000 and up. He says that during the COVID-19 economic crisis, homes in the $250,000 range remain a hot commodity.<\/p>\n

\u201cThat\u2019s partly because the higher-priced homes have a more limited audience,\u201d he explains. \u201cThe lower-priced homes appeal to first-time homeowners who are eager to take advantage of the lower interest rates.\u201d<\/p>\n

Metro vs. rural areas<\/h3>\n

As with most elements of real estate, it\u2019s all about location, says Lee. \u201cLuxurious houses in over-developed areas will be hurt more, such as New York City and San Francisco,\u201d he points out.<\/p>\n

\u201cAlready depressed cities will be hurt less, such as Detroit and Cleveland. Some inland states will also be hurt less, such as Wyoming and North Dakota.\u201d<\/p>\n

Shirshikov notes that recession-triggered home price declines are typically limited to metropolitan areas. \u201cHistorically, following a disaster, home prices in major cities decline, and more rural and suburban homes outside the city see price increases. This is due to individuals leaving cities and entering markets that are safer in comparison,\u201d he explains.<\/p>\n

Impacts by industry<\/h3>\n

Isack Kohn<\/a>, CPL, an oil and gas professional with over 15 years of experience in land acquisitions and financial modeling, says the housing markets most vulnerable to a recession are those in cities that support the energy industry. In his Texas market, that\u2019s mainly Houston, Midland, and Dallas. \u201cThe least vulnerable markets are those revolving around the production of economic staples,\u201d he says. \u201cThat\u2019s not to say they won\u2019t feel the pain \u2014 just less so.\u201d<\/p>\n

New vs. existing homes<\/b><\/h3>\n

As far as property types, Kohn says newer developments are more at risk, because developers or homebuilders could potentially go out of business and leave unfinished homes or empty lots. Neighborhoods that are already built out and well-established tend to better weather the storm.<\/p>\n

\"A<\/a>
<\/a> Source: (Markus Spiske \/ Unsplash)<\/figcaption><\/figure>\n

Tips for pricing a home in a recession<\/h2>\n

If you\u2019ve decided to list your home<\/a> during a recession, pricing is everything. Keep these expert tips in mind to help maximize your sale price:<\/p>\n

Don\u2019t overprice:<\/b><\/h3>\n

\u201cDuring a recession, you\u2019re not in a position where you can overprice a home and count on negotiating back,\u201d Graf warns. \u201cIf you\u2019re overpriced, agents will be less likely to show your home.\u201d<\/p>\n

Shirshikov agrees that sellers should under-price homes and wait for multiple buyers to start bidding, which gives the seller leverage.<\/p>\n

\u201cSellers who price like nothing is happening will end up with their house on the market for a long time and will have much lower interest, even if they eventually cave and lower their asking prices,\u201d he warns.<\/p>\n

Take a cue from the comps:<\/b><\/h3>\n

Stinson typically sets prices at 3% to 5% above comps, but in a recession, he looks at pricing 3% to 5% percent below the comps.<\/p>\n

Have your home ready when you list:<\/b><\/h3>\n

In an economic decline, buyers tend to have less extra cash to spend on improvements, and will gravitate to homes that are well-maintained, updated and move-in ready.<\/p>\n

\u201cIf two homes are in the same neighborhood with the same square footage and are very similar, but one shows better than the other, that one will ultimately sell at a higher price,\u201d Graf predicts.<\/p>\n

Have a strong marketing plan:<\/b><\/h3>\n

That\u2019s where a trusted real estate agent comes in. Talk to your agent about how he or she plans to promote your property<\/a> and boost visibility.<\/p>\n

Know what to expect:<\/h3>\n

When setting a sale price, use a calculator<\/a> to determine how much you\u2019re likely to make when your home sells, based on its value, location, agent commission, and remaining mortgage.<\/p>\n

Consider renting out your property:<\/h3>\n

If you\u2019re not in a position to lower your price to accommodate a down market, Kohn says it might make more sense to rent out your property for the time being.<\/p>\n

\u201cAs long as your tenants maintain the property, it can become a passive income stream instead of a financial loss,\u201d he explains. \u201cOnce the market recovers, you can then put the home back on the market.\u201d<\/p>\n

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