A U.S. recession may be coming. What does this mean for the U.S. real estate market?
- With the S&P 500 index down more than 11% in just two weeks, relevant investors will definitely be curious about what will happen next for the still-hot real estate market. .
- Although U.S. mortgage rates are near decade highs, U.S. home prices remain high.
- Some believe that a wider economic downturn could eventually bring home prices back down.
House prices are in the spotlight as worries about an economic recession deepen after the S&P 500 index fell more than 11% in just two weeks. Despite rising mortgage rates and falling demand for housing, the U.S. housing market remains hot. Tight supply, inflation and rapidly tightening monetary policy have some analysts betting on a sharper economic correction. So what will happen to house prices during an economic recession?
Judging from historical performance, house prices will fall. Reduced demand for housing during a recession typically drives home prices lower, as was the case in 2008 when the housing bubble burst and led to the global economic crisis. In many ways, however, the similarities between the modern recession and the Great Recession end there.
The current housing market is no longer the housing market of 2006-2007. During that period, American homes were severely oversold due to artificially low interest rates and irrational lending practices. Mortgage brokers now have much stricter legal obligations on their loans, so homeowners are less at risk of defaulting on their loans. Perhaps most importantly, home values have not been severely inflated by artificially high demand.
In 2022, due to the imbalance between supply and demand in the housing market, housing prices have remained strong, and the inventory of houses is now significantly low. As of the end of March, judging from the recent sales pace, the supply of homes for sale in the United States is only enough for two months, which is significantly lower than the average five-month inventory level of the housing market during the period of supply and demand balance. Although the total number of mortgage loan applications continues to decline by more than 50% compared with last year, housing prices in the United States have remained stable due to the limited supply of housing.
What will happen to U.S. housing prices during a recession?
The real estate market's organic pricing advantage means it is less likely to collapse, which also means it is better able to withstand the downward pressure on house prices that may result from an economic downturn.
In theory, a recession should make housing more affordable, but now that the housing market in the United States has been significantly depressed, it means that housing prices are somewhat immune to contractionary forces. This is obvious in the current housing market, even This is also true before major economic collapses.
Although mortgage interest rates climbed 4% from January to March, U.S. housing prices have basically maintained an upward trend so far this year. From the first quarter of 2021 to the first quarter of 2022, U.S. home prices rose an average of 21%, while mortgage rates were near their highest levels since 2008. As mortgage rates are likely to continue to soar in the wake of Fed rate hikes, the U.S. housing market may eventually be affected by an unfriendly sellers' market, whether this will ultimately cool home prices or slow down current home prices. The speed of the increase remains to be seen.
For more information about the U.S. real estate market, please review "After the Federal Reserve raises interest rates by 75 basis points, will the U.S. real estate market reappear the tragic situation of the 2008 financial crisis?" 》
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Author: Linggu Weibu
Editor: Cai Caijun
