What Happens to House Prices in a Recession?

Wondering what happens to house prices in a recession? We’ll talk you through what to expect for the housing market when the economy stalls.

When the economy hits a recession, major changes take place. Unemployment rises. People halt all nonessential purchases. Investors get nervous and the stock market drops. In many places, home values are negatively impacted.

Recessions are scary — especially for homeowners who are considering selling. Because there is no clear beginning or end to a recession, it’s hard to know how it will affect house prices and your plans to sell. Sometimes, even speculation about future recessions is enough to present a challenge.

During a recession, people scale back their spending, especially on bigger purchases like automobiles and homes, and businesses are often forced to lay off workers as a result.

As difficult as they are, recessions are not as bad as depressions. The Great Depression of 1929 lasted nearly a decade until the financial position of the country and its residents improved. 

Since then, there have been nearly a dozen recessions lasting around a year or two each. The last recession, from 2007 to 2009, was sparked by the U.S. housing market crash. Homeowners saw their house prices decline dramatically during that recession. To determine our current risk levels and plan accordingly, we first need to understand the factors that cause recessions. Let’s take a closer look:

Do House Prices Fall in a Recession?

Economists consider many different things to determine if a downturn in the economy is actually the start of a recession. Along with analyzing a country’s GDP, interest rates, and unemployment numbers, they also consider a less quantifiable indicator called the “confidence level.”

The confidence level, which is measured through surveys of the general public, helps officials understand how people are feeling about the market. If their confidence that things will improve is low, they are more likely to hesitate when considering big purchases. 

So what happens to house prices in a recession? When there are fewer people in the market looking for homes, the demand drops. If there is no change in the supply of homes on the market, homes are worth less until demand grows or fewer people try to sell. 

What About the Local Economy?

It’s possible that your state, city, or neighborhood has been impacted differently by the current economic situation than other areas. Housing prices can vary dramatically, depending on the location. If your house has attractive features like a great view, easy access to highways, or plenty of amenities, prices might not drop at all during the recession.

The Great Recession of the mid-2000s impacted the entire nation because it was caused by systematic issues within the lending industry. Lenders were enabling buyers to purchase homes that they could not truly afford, inflating values as the demand for homes rose. When the crash came, it hit the United States very hard. Thankfully, there are now laws in place to protect home buyers from these practices. 

Is the Housing Market Going to Crash in 2020?

Here’s the good news: Home appraisers aren’t focused on what could happen a week, a month, or even a year in the future. They’re only interested in the value of your house on the day they visit it. Their research is designed only to support their findings for a home value appraisal, not to predict the impacts of a recession.

Of course, part of what appraisers consider is the prices at which other, comparable homes in your community have recently sold. If you are ahead of the curve and put your home on the market before others in your area, your home value will not change much. However, if others around you are struggling to sell, you may find that your appraisal is lower than expected.

Is Now the Time to Sell?

No real estate agent, mortgage broker, or other housing market professional knows what the next recession will look like in terms of its impact on house prices. Sometimes, the answer has to do with the type of home you own. Because home construction has slowed over the last few years, moderately priced homes may still be in demand. 

If real estate professionals don’t know, that means homeowners probably don’t either. Sometimes, unforeseen bills, a new job, a divorce, or difficult family circumstances will require that you sell, regardless of the economic forecast. 

If you decide to sell your home during a recession, it will likely take more time for the sale to go through. If you list at pre-recession house prices, you won’t have many interested buyers. You may need to reduce your asking price or add other incentives, such as paying for closing costs or including some furniture, into the deal. 

It’s also important to have your home completely ready for an interested buyer to move in. That means fixing any broken systems and cleaning both the inside and outside thoroughly. You also must pack up your possessions so that any potential prospects can imagine themselves living in your space. 

If this work feels overwhelming, consider the alternative solutions that let you access your equity while staying in your home as long as you’d like. Recessions can be a stressful time, but understanding how the economy can impact your home value can help you to make a smart decision for your financial future.

How Can You Avoid Economic Impacts?

The financial hardship caused by recessions often prompts homeowners to tap into the cash equity that is locked up in their homes. This money can be used to cover medical bills, college tuition, or even day-to-day expenses. However, the change in housing values may cause you to reconsider a sale.

Many homeowners will instead look toward alternative programs to access the cash they need without having to sell in the middle of a recession. Sale-leaseback programs allow homeowners to benefit from their investments in a fair, fast way without having to struggle with the challenges of selling a home during a recession.

Key Takeaways

It’s important to be prepared before a recession occurs. Talk to a financial and real estate advisor to better understand the way a recession can impact housing prices and learn more about your options.