Major Recession Coming

The International Monetary Fund, or IMF, recently issued a warning that one-third of the global economy will be in a recession this year. While the U.S. may or may not be in a recession as of now, we have seen several recessionary indicators, including a deeply inverted yield curve, declining leading economic indicators, and two consecutive negative quarters of GDP.

When people hear the word recession, they may think that home prices are likely to decline. But history shows us that home values have done very well during and after 8 of the past 9 recessions. In fact, recessions have often proven to be a good buying opportunity.

Let's go deeper

The housing market is one of the most important indicators of a nation's economy. It is often the first to feel the effects of a recession and the last to recover. A recession could however cause the housing market to suffer in a number of ways. One of the most obvious ways is through a decrease in demand for housing. When people are struggling financially, they are less likely to be in the market for a new home. This can lead to a decline in home prices and a decrease in the number of homes sold.  One thing that is offsetting this are lower mortgage rates.  Mortgage rates improve during a recession.

Historically, another way a recession can affect the housing market is through a decrease in the availability of financing. During a recession, lenders may become more cautious and tighten their lending standards. This can make it more difficult for potential buyers to qualify for a mortgage, and can also lead to higher interest rates.  However what we have seen in this market (unlike the norm) is that lenders are getting super-creative to keep homebuyers in the game.  From temporary buydown options that can lower the rate of the incoming homebuyer by up to 3% in the first year to a 'refi promise' as lenders encourage buyers to marry the house and date the rate! 

In addition, a recession can also cause home builders to slow down construction, which can lead to a shortage of new homes. This is happening as they are VERY cautious having learned their lesson back in the financial crisis of '08.  This can also result in an increase in home prices, as there will be less available homes on the market.  We've already seen what a continued lack of supply coupled with low interest rate and a growing group of buyers can do to home prices.  (Please no more bidding-wars!)

Finally, it's worth mentioning that the housing market can be affected by the overall sentiment of people during a recession. People tend to be more cautious and less optimistic during a recession which can influence their decision to buy a home.  As it stands, even though the market has come back to be substantially more favorable for home buyers, there is still a massive 'fence setting' with most planning to wait it out.  Wait till rates come down and housing cools off.  I mentioned in a recent video that if you want for this, you will be too late!

As a wise Jedi once said: "the fear of loss is a path to the dark side."  During a recession, many people will be hesitant to invest in a home, as they may be concerned about losing their money. This can be a vicious cycle, as their hesitation can further slow down the housing market, making it even harder for people to buy homes and further prolonging the recession.  

The conclusion of the matter

To sum up, a recession can have a significant impact on the housing market, but take it from me that today’s market is the friendliest buyers' market in years and this pending recession will do nothing but good for mortgage rates.  As Yoda said, "ready are you?"  Let's be prepared for this market, dust of that pre-approval letter and may the force be with us!

@Rick Elmendorf (NMLS 485091)

If you have any questions about mortgage finance, or anything contained in this article, please email me at rick@loanwithrick.com with any questions or comments.  Also, if you would like to see current rates, head over to www.rate.com/rickelmendorf and check it out.  For military or investment homes, be sure and click the 'advanced search'.