What Will the Housing Market Look Like in the Next Recession?
Depending on what news bulletin you're listening to or which economist is talking, the U.S. -- and probably the rest of the world -- is on the brink of recession at just about any moment. Time and time again, however, the economy has remained steady over the last few years.
Of course, what goes up must come down, and lingering memories make many homeowners concerned.
The Great Recession technically began in December 2007 and ended in June 2009, but many Americans are still still dealing with the effects -- particularly from the housing market crash -- years later.
[Read: Protecting Your Property: Scams That Put Homebuyers and Homeowners in Danger.]
Some homeowners still haven't fully recovered, with roughly 5.2 million homeowners owing more on their home than it's worth at the end of the first quarter of 2019, according to real estate information company ATTOM Data Solutions. While that number, representing 9.1% of all mortgaged properties in the U.S., is a slight increase from the end of 2018, when 8.8% of mortgaged homes were seriously underwater, it's still far lower than anything seen in the aftermath of the recession. Negative equity hit its peak in 2012, when nearly 30% of homeowners were underwater on their mortgages.
On a national scale, real estate has come a long way since those dark days, and home values continue to rise in most major markets and are expected to increase a total of nearly 4.1% nationally in 2019, according to real estate information company Zillow. Low inventory of available homes on the market and a high volume of buyers contribute to the price increases.
But since the economy is now largely flourishing and has been for a few years, people naturally wonder when it will begin to slow and are nervous about how badly they'll be affected when the next downturn hits.
Fortunately -- and hopefully -- the history of recessions and current issues that could harm the economy don't lead many to believe the housing market crash will repeat itself in an upcoming decline.
"It was called the Great Recession for a reason," says Skylar Olsen, director of economic research for Zillow. "That was a really big one in the course of recent history -- that was an exceptional recession. ... It would really ease fears to just remind people, 'Hey, there were other recessions first that were much milder.'"
Here are three things to know about how the housing market could fare in the next recession, plus what you can do to prepare yourself.
Housing Won't Be the Problem
According to the 2019 Zillow Home Price Expectations Survey released June 5, 50% of the surveyed economists, investment strategists and housing market analysts believe the next recession will begin in 2020, with 19% predicting it will begin in the third quarter.
Experts surveyed point to trade policy as the most likely cause of the next recession, followed by a stock market correction and geopolitical crisis -- all of which would be a far cry from the lax lending policies and financial liquidity issues that contributed to the Great Recession.
"If a recession is to occur, it is unlikely to be caused by housing-related activity, and therefore the housing sector should be one of the leading sources to come out of the recession," says Mark Fleming, chief economist for title insurance company First American Financial Corporation.
As Fleming notes, the housing market has traditionally aided the economy in recovering from a recession, as consumers who are less effected by the downturn are willing to buy and sell, and existing homeowners are able to take advantage of equity in their properties.
In the midst of a recession where subprime mortgages are not a significant factor -- as experts predict they wouldn't be in the next downturn -- it's reasonable to expect homeowners to stay where they are while things are uncertain and wait to move when they feel more confident, which can help get other parts of the economy moving.
Olsen says job loss and uncertainty can still lead to a drop in housing demand, although in a future recession it's more likely to be short-lived. "We still expect that to be a part of the story, ... but much milder," she says.
Always Expect Housing Markets to Ebb and Flow
While housing isn't expected to be problematic on a national level in the next recession, some markets will likely take bigger hits than others.
Even outside of a large-scale recession, individual housing markets and geographic regions often see peaks and plateaus, rising with demand and then experiencing a downturn once prices go beyond what homebuyers are willing to pay.
Already, many markets across the U.S. have seen a slowing demand among buyers. Olsen notes that this price correction makes up for recent years when housing inventory was so low it caused rapid home value increases. Rather than serving as a precursor to recession, these housing markets are preparing, in a way, for a period when the economy tightens.
"Housing will be even better positioned to make it through the next recession without significant home loss," Olsen says.
But even if home values experience a dip on a national scale due to a slowing economy, a slight drop wouldn't instantly lead to foreclosures. Fleming notes that the housing crisis in the Great Recession was fueled heavily by the fact that job loss was paired with a significant share of homeowners who didn't have much equity in their homes. On the whole, homeowners aren't making the same mistakes, and they have much more equity in their homes if prices drop.
"Homeowners, collectively, have a pretty big cushion today to withstand some price decline," Fleming says.
Homeowners Shouldn't Worry -- if They Can Make Payments
In addition to the equity homeowners have, Fleming notes that the vast majority are also locked into 30-year fixed-rate mortgages, most likely having refinanced during the recent period of historically low interest rates.
With a low interest rate and affordable monthly payments, Fleming says most homeowners are in a good place if the economy slows. If you haven't refinanced yet, there's still time to do so. The Federal Reserve announced in March that it plans to keep the federal funds rate at 2.5% for the remainder of 2019.
The Fed's decision not to increase the rate, combined with a less competitive housing market overall, has helped keep mortgage rates low in recent months. Freddie Mac reported at the end of May that the average 30-year, fixed-rate mortgage interest rate fell to 3.99% at the end of May, which is the first time it has below 4% since January 2018. For many homeowners looking to shave a bit off their monthly payments with an economic downturn in mind, now would be a good time.
"If you can knock down you mortgage payment a couple hundred dollars a month, maybe that gives you a little more breathing room in the event of the recession," Fleming says.
[Read: How to Buy a Foreclosed Home]
Even for those homeowners still underwater from the last recession, Fleming says as long as they're making monthly mortgage payments, they don't need to worry.
"The challenge is when you're underwater on that mortgage, and then for some reason you lose the ability to make that mortgage payment," Fleming says.
To combat that, Fleming recommends following this age-old personal finance advice: Make sure you have six months of living expenses saved up in case you fall victim to layoffs.
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