Would a Recession Clobber the Housing Market or Make It Affordable Again?

Published by REALTOR.com | February 20, 2024

Fears of another recession striking have been mounting as the Federal Reserve has attempted to slow the U.S. economy down by raising interest rates.

While the Fed’s rate increases brought the real estate market to a near halt and contributed to the scores of layoffs at some high-profile companies, it’s looking more likely that the Fed might just pull off a “soft landing” for the economy after all.

That would be a good thing for the housing market, right? That depends.

If Americans have good jobs they aren’t afraid of losing, they’re more likely to buy and sell homes. That’s a plus for the housing market, which stalled last year under the weight of high mortgage rates and home prices in addition to a dearth of homes for sale.

“People with jobs and income buy houses,” says Realtor.com® Chief Economist Danielle Hale. “If we see layoffs, it could mean lower home sales.”

However, skirting a recession could result in mortgage rates staying higher than they would during an economic downturn. Those elevated rates could continue to be a challenge for buyers grappling with the high costs of purchasing a home.

Higher rates could also persuade more would-be sellers to hold on to their properties—and the low rates they locked in during the COVID-19 pandemic. That might be more attractive financially than listing their homes and buying new residences at higher rates.

The problem is this would worsen the existing housing shortage.

“There’s still a good chance that we skip an outright recession this year,” says Jacob Channel, senior economist at the online marketplace LendingTree. “The economy may, and likely will, slow down in some respects. But I don’t think growth is going to come grinding to a complete halt.”

Yet even if the economy remains strong this year, it might still have to navigate through some turbulence.

Since the start of the year, a string of companies with household names have announced layoffs, such as Amazon, Cisco, and Zoom. Some have reduced their workforces significantly.

That’s left many workers on edge, even those who don’t work for these employers. Those folks aren’t likely to want to make what could be the largest purchase of their lives when they’re worried about their livelihoods. Fewer buyers could mean those still in the market wouldn’t have to contend with as many heated bidding wars and offers over the asking price.

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