What Causes a Housing Market Recession?

With economic turmoil wreaking havoc across the globe, it makes sense that some folks are starting to prepare for the worst. The housing market in particular may seem susceptible to a crash, as prices and interest rates have increased mortgage demand has and the economy is slowing down.

Before you start to panic, though, consider: is there any legitimacy to these worries?

Some experts would argue that no, the housing slide predicted to hit in the near future could be nowhere near as bad as in 2008. Some even claim that the Great Recession of ‘08 had little to nothing to do with high home prices.

However, it’s hard to deny the evidence that seems to be flooding the news: rents and housing prices are at all-time highs with record shortages, leading to impossible bidding wars and record homelessness rates across the US, among other issues. So, in times like these, who or what can you believe? Where can you start?

The easiest way to get to the bottom of all this housing madness is to understand two key ideals: what is an actual housing market recession, and what causes one to occur?

What is a Housing Market Recession?

A housing recession is a period of time, usually at least six consecutive months, during which housing sales continue to fall. Those familiar with recent real estate trends will likely be aware that, as of July 2022, we were officially in a housing market recession, with reports from the National Association of Realtors (NAR) demonstrating a nearly 15 percent decline in home sales between July 2021 and July 2022.

However, it’s important to differentiate between a housing recession in regards to home sales, and a recession in terms of home prices. Lawrence Yun, NAR’s Chief Economist, said on record that “We’re witnessing a housing recession in terms of declining home sales and home building…However, it’s not a recession in home prices. Inventory remains tight, and prices continue to rise nationally, with nearly 40% of homes still commanding the full list price.”

With housing prices still on the rise, it makes sense that both sales and construction could decrease over time, particularly given existing inflation and supply-chain issues making it difficult for some individuals to afford homes. While that seemingly has yet to impact housing prices on the whole, it’s likely only a matter of time before residential real estate prices start to feel the burn.

Capital Economics’ Chief Economist Neil Shearing noted that, as of early July, “mortgage applications [in the US] have fallen by 28% from their peak, new home sales are down by 17% and housing starts have dropped by 13%,” while other experts predict that a fall is inevitable, and that the question is “when,” not “if,” housing prices will drop.

What Causes a Housing Market Recession to Occur?

Unlike housing market bubbles, which result from periods of economic prosperity, low interest rates, and easy credit access, housing market recessions stem from increased interest rates and construction costs, much like what we’re seeing right now.

Supply chain issues caused by the pandemic have contributed to immense slowdowns in material acquisitions needed for home construction, while inflation has continued to push prices up beyond affordability. Similarly, between exorbitant home prices and rising interest rates, many would-be homeowners are reluctant or unable to invest in a home, pushing many out of the housing market.

While housing prices are still high, they may not remain so for long with sales and demand significantly dipping. Something has to give.

Will There be Another 2008 Housing Crash? 

Many real estate analysts are of the belief that any future housing crash will not resemble the 2008 recession in its severity.

Why? Despite a number of similarities between now and then, significant changes have been made to sectors, such as banking, which played a role in the housing bubble burst years ago.

Prior to the crash, mortgages were handed out like candy to those who might not otherwise have qualified or met necessary lending conditions (subprime borrowers). Since then, lending practices have been adjusted and reforms made to help prevent or defend against the lending practices which contributed to economic downfall again.

Although recession concerns remain a very real threat, analysts maintain that, due to increased housing equity and an otherwise strong market, sellers are still more likely to unload their homes for some degree of profit, rather than succumbing to foreclosure. Shmuel Shayowitz, the chief lending officer at New Jersey-based firm Approved Funding, even publicly denounced the idea that we are presently in a housing bubble, nothing that “while the excessive surge in home appreciation is unsettling, much of it is a result of low inventory” exacerbated by the pandemic.

So, it’s already here?

According to some experts, the US is already in a housing sale recession. A crash or recession in housing prices may soon follow, as well.

Despite this, it’s near impossible to predict when it will occur, and just how severe the situation will become. Given what we know about the previous crash and the market’s condition as it stands, however, real estate enthusiasts can find solace in the fact that, despite the similarities between now and 2008, it is unlikely that such a housing crash will occur in the near future.

If you’re curious in learning more about real estate investment in these unique times, reach out and schedule a time to speak with one of HUDSONPOINT’s Investment Executives.