There is a lot of talk lately about a possibility of a recession. Is one coming? What could it mean for home prices and interest rates?
Here are some of the indicators of a recession.
- High unemployment. Higher unemployment means that consumers have less spending money and there are fewer dollars going into the economy. If businesses start laying off employees, that usually means that businesses are anticipating a slowdown.
- High inflation. Inflation is another indicator, as inflation increases, money holds less value. Right now we are at a four decade high inflation rate.
- Tighter Federal Reserve policies. The Federal Reserve can influence whether the economy heads into a recession. The Fed is very concerned about inflation and are working to try to lower the inflation rate. By doing this, they may slow the economy down.
- Waning builder confidence. Homebuilder confidence is another piece of the puzzle. Housing starts have slowed in recent months and many builders are worried and remember 2008. They are trying to be cautious but they also have supply chain issues and labor shortages.
So what happens to the housing market during a recession?
As inflation drops, mortgage rates could also drop. Usually inflation and mortgage rates follow each other. The charts I have seen show as we see inflation increase, mortgage rates follow. And as inflation cools off, mortgage rates also drop. If you look back over the past recession periods, interest rates dropped but home prices usually stay steady and sometimes increase. This did not happen in 2008 and 2009 but that had more to do with the lending standards back then. The mortgages written in the early 2000’s were frequently no income verification loans or 100% financing without reserves. When the market changed in 2008, homeowners didn’t have the funds to cover their payments. For some homeowners, they had adjustable rate loans that adjusted to include interest that had not been paid, suddenly their payments increased and they could no longer afford the home. This is not the current situation. Most homeowners have equity in their homes and the lending standards are much stricter than they were prior to 2008.
What should slow down is the number of bidding wars. We still have a lot of people looking to buy and the housing inventory is still very low. However higher interest rates will affect how much buyers can afford and this could slow down the bidding wars we have been seeing over the past few months. Homes prices should still increase, but probably at a much slower rate.
Remember that real estate is usually a long term investment. Most people stay in their homes for several years and slowly gain equity. It’s not always about the perfect timing of the market, but more about buying at the right time for your personal situation.
Leslie Vanderwerf, NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website
