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Are We in a Real Estate Recession?

By Ben Shepardson | August 22, 2022
  • While inflation rates in the US dipped slightly during July, they're still at the highest levels this century. This has caused widespread speculation about the country's economic future. At this time, one of the biggest questions on the lips of every concerned citizen is, 'Are we headed for a recession?' 

    This is a frightening outlook. Yet, a recession isn't necessarily a bad thing for first-time buyers wanting to enter the real estate market.

    Keep reading to find out what a recession is, and whether we can expect one any time soon. 

    buyers

    What Is a Recession?

    A decline in GDP for two successive quarters is the defining criterion for a recession. A recession also features:

    • High prices
    • Increasing unemployment
    • Industrial stagnation
    • Poor retail sales
    • An overall decline in consumer spending

    According to an advance estimate, the United States GDP dropped by 1.6% in the first quarter of 2022, followed by a further decline of 0.9% in the second quarter. Yet, this isn't necessarily a sign we're headed for a recession.

    Unemployment is one of the most influential characteristics of a recession. At the moment, the unemployment rate is still heading on a rapid downward trajectory after the pandemic.

    What Happens to Real Estate Prices in a Recession?

    In general, a recession causes real estate prices to fall due to constrained spending, but lower house prices aren't an indicator of a recession on their own. In addition, real estate prices are still rising across the US, albeit slower than before.

    Two years of unprecedented growth in home values, and recent increases in interest rates, are the main drivers of this downturn. However, many other factors can affect the real estate market, too.

    Factors That Can Impact Home Prices

    As in any marketplace, real estate prices hinge primarily on demand vs supply, coupled with current mortgage interest rates. In 2020, lowered interest rates caused a massive upswing in demand from home buyers.

    First-time buyers rushed to take advantage of this benefit, while homeowners saw it as a chance to upgrade to a larger home at more affordable rates. As a result, the real estate industry thrived, and prices soared in almost every neighborhood.

    Attractive interest rates weren't the only phenomenon driving this demand. Increasing opportunities for remote work means homeowners are not bound to specific locations anymore.

    In light of this, some homeowners opted to sell their current homes and move out of the city to more isolated locations. This caused an unnaturally high demand for homes in these usually inexpensive markets. 

    At the same time, investors snapped up homes in traditional high-demand areas, intending to sell them when the market returns to normal. 

    Supply chain disruptions and business closures impacted the home construction industry during 2020.  This caused a shortage of newly-built houses and has contributed to sparse availability. 

    The recent decrease in home price increases and home buying activity has nothing to do with unemployment or finances. Rather, it's a by-product of interest rates returning to normal, and cautious buyers anticipating a recession. 

    Buyers who snapped up properties while the interest rate was low are unlikely to sell any time soon, thanks to favorable fixed mortgage repayments. 

    All these unusual situations make it difficult for analysts and forecasters to predict what may happen next in the real estate market. 

    Expert Opinions on the Economy

    According to Fitch Ratings, a real estate crash similar to that of 2007 is unlikely. That's thanks to low inventory and general disinterest in selling homes snapped up at low fixed interest rates.

    Lead analyst at Housing Wire, Logan Mohtashami, states that the US isn't in a housing bubble like it was in 2007 either. The country is simply experiencing unnatural home price growth.

    Ken H. Johnson, of Florida Atlantic University, finds the price acceleration worrisome, and Fannie Mae economists agree. 

    Despite these fears, most analysts feel a price plateau is on the horizon for real estate, rather than a dramatic crash. Matthew Pointon of Capital Economics suggests an overall decline of 5% by mid-2023.

    Overall, high mortgage rates, tight credit conditions, fixed-rate mortgages, and good employment rates should protect the housing market from a crash. 

    There are five reasons why the housing market won't crash, according to these experts:

    • Record low inventories keeping prices high
    • Slow construction of new homes
    • New buyers entering the market
    • Strict lending conditions
    • Muted foreclosure activity

    Mass foreclosures can flood the housing market, causing huge price declines. Thanks to restrictions on default notices during the pandemic, and homeowners having comfortable equity in their homes, this is unlikely. 

    There's no doubt that foreclosure activity is returning to normal, but it's not at a level that's likely to cause concern. 

    Home Selling in Uncertain Times

    If one were to apply the strictest definition of the word, 'recession', one could say that the housing market has receded in the last year. That's because there's a decided decline in availability.

    It's only natural for sales to decrease when there are fewer houses to sell. Despite this, many homes are still going under contract within 14 days, which is only a few days short of the peaks seen last year.

    Ultimately, the slowdown in sales will simply mean that buyers might have more say in what they pay for homes in the future and buyers will have less negotiating power. 

    In short, this means buyers will need to adjust their tactics to cope with these new market conditions. These are some tactics for homeowners that could help them sell their homes faster nowadays:

    List Sooner, Rather Than Later

    There's no reason for sellers to panic over declining house prices. There's still time to get a good price for homes at the moment.

    Buyers are keen to invest in a new property before interest rates rise again, which can work to the seller's advantage. 

    The current inventory levels are still low, so homes in hot markets will still experience high demand, and fetch higher prices. It will take many years for a buyer's market to emerge.

    Beware of Overpricing

    It's tempting for any seller to list their home at a high price and hope for the best. Yet, these properties won't attract much interest from buyers. 

    As things return to normal, the market is correcting itself, which means standard practices now apply. Sellers can expect to negotiate prices, undergo home inspections, and agree to professional appraisals.  

    Buyers are shopping around a lot more than they were two years ago and are more likely to offer below the list price. 

    Consider Appealing Upgrades

    Selective updates can bring a high ROI when it comes to home sales, especially while prices are still high. DIY projects are particularly lucrative for home sellers as they add value at a low cost. 

    Sorting out niggling maintenance issues is an obvious first step in preparing a home for sale. Simple fixes like painting the home's exterior, upgrading lighting, and adding sustainable energy solutions can increase any home's appeal to buyers.  

    Rent, Don't Sell

    Real estate price increases and shortages pale in comparison to what's going on in the realm of rentals. Rents have increased astronomically in most areas.

    Homeowners who are struggling to sell their homes or who feel uncertain about current market conditions should consider renting them instead. This is the best way to earn passive income until the market stabilizes.

    It's vital to engage with a property manager or broker when going this route. These professionals vet tenants to ensure timeous payments and protect the home from damage and neglect. 

    Working With an Experienced Realtor

    A real estate agent can help homeowners weather these uncertain times with as little stress as possible. Their experience and knowledge are vital for pricing properties correctly and selling them as fast as possible.

    A realtor helps smooth the negotiating process and can offer advice on home improvements. They know when to stick it out in the market or opt to rent it out instead. 

    It's best for homeowners to work with one real estate agent, open mandates can cause confusion and extra work. A dedicated agent is also more motivated to get the home sold as quickly as possible.  

    Keep Track of the Real Estate Market

    While a recession is unlikely in the immediate future, we live in interesting times regarding real estate. This makes it difficult to anticipate the best time to buy or sell a home. 

    If you're considering one of these options, it's easier for anyone to plan their next move when they're up-to-date with the latest real estate news.

    Both first-time buyers and seasoned real estate experts can gain something from our website. Keep browsing for the latest tips and information.

    Ben Shepardson is a Realty Biz News Contributing Writer and has a long track record of success in online marketing and web development. While pursuing a bachelor’s degree in Computer Information Systems, he worked doing enterprise-level SEO and started an online business offering web development services to small business customers.
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