Waiting for the Housing Market to Decrease? Here's why it may be time to stop waiting.

Waiting for the Housing Market to Decrease?  

Here's why it's time to stop waiting.

It's hard to turn on the radio or the television and not hear a slew of “less than rosy’ economic buzzwords like inflation, recession or rising interest rates.  Check your receipt at the grocery store or your bill from your favorite local restaurant and we’re sure you’ve seen the impact of those terms on your wallet. So how is the local economic climate likely to impact the housing market? We’ve heard some hopeful homebuyers express that they are waiting for a downturn in housing prices as a result of these tougher economic times.  Here’s why the market is likely to disappoint them and those counting on a pricing downswing.

First, let’s look at the historical relationship between pricing and recessions. Based on the last 5 recessionary periods, a dip in the economy doesn't necessarily result in a dip in the housing market.  While most recently, Covid brought on an overall economic slowdown, the housing market saw record growth. The option to work from home and the value of additional space, backyards and amenities became a priority and buyers flocked to the market. Add in record low mortgage interest rates and you have the hotbed market we saw from the Covid lockdowns to the mid-summer of 2022!  So we had an economic downturn, but no housing market downturn.

But what about other recessionary periods? Many will point to the recession of 2007 to 2009, where we definitely saw successive and significant declines in home prices.  However, this period was unique. Most economists will agree that the source of this recession was the housing market itself. It was unnaturally inflated by fraudulent loan applications (just tell us what you make applications/stated income applications), and irresponsibly lax lending standards that didn’t truly consider a buyer’s ability to perform. In fact many buyers admitted they took out loans knowing that in the long run they couldn't’ perform under the loan, but they counted on an equity upswing and refinancing at a later time.  That worked for a long time, until it didn’t and then people were faced with loans they couldn't afford to pay back…and how quickly the house of cards fell.  A slew of legislative protections were enacted to help prevent this from happening again. Now, buyers actually have to qualify to take out a loan.

But there were other periods of economic contractions (aka recessions) and those also failed to show a decrease in housing prices.  The 2001 and the 1990-91 recessions both saw housing markets that continued to grow despite the economic downswing.  Similarly, in the 1981-82 recession, despite severe economic contractions, overall housing prices continued to climb. Why?  High inflation (sound familiar?) made real estate an attractive option.  So, four out of five of the recessions all hosted an upward swing in housing prices and the one that did not was caused by the housing market.

So does housing live outside of general economic markets? Absolutely not.  But it is unique and multi-faceted. It is an investment. It is a fundamental need.  Its passive income. Yet it still follows some economics 101 principles: supply and demand.  If you have seen any of the data over the last decade on new housing starts (new construction) and compared it to new household formation numbers, the math adds up to a shortage in housing supply. Its what we’ve seen and will likely continue to see for quite some time.  But that’s a topic for a different day.  For today, recession + inflation + supply shortage = upward push in housing market, despite interest rate increases (also a topic for a different day). 

In the meantime, we expect increasing property values, despite the recession.

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