What Happens to Housing and Real Estate in a Recession

Posted on Sep 9 2019

The goal of the dynamic structure of the U.S. economy helps ensure that if one sector should lag, the nation is still able to avoid the type of collapse that triggers a recession.

That's the theory. The reality is that recessions are often triggered by a domino effect, that is, even though multiple drivers of the economic engine are sound, one troubled area could cause the rest to collapse.

It is important to remember the psychological nuances of a downturn as we read predictions of a looming recession, despite the fact that some key indicators are strong at this time. Recently reported figures from the U.S. Dept. of Commerce showed strong July retail sales figures, rising 0.7 percent for the month after a .03 percent gain in June.

Two of the most important recession-related markets to watch are housing and real estate. The U.S. is currently enjoying one of the largest economic expansions in its history, with housing and real estate at or near the front of the positive activity.

But even though the housing and real estate markets are so visible - and sometimes so vulnerable - a recession does not always mean that they will collapse. In fact, many economists believe the opposite, declaring that even in tough times, people still need a place to live and businesses still need a place to operate.

This attitude is supported by real estate data showing that in the five recessions since 1980, only two of them - 1990 and 2008 - showed a decrease in home prices. And a strong case could be made for dismissing the 2008 decrease as that recession was triggered not by a housing collapse, but by the collapse of a financial house of cards.

Should the U.S. enter a recession in the next couple of years, the value of housing and real estate may only plateau at worst. That, however, may never come to pass this time around because several key areas of the country are facing severe housing shortages: In June, the Joint Center for Housing Studies reported that “The tight supply of homes for sale is keeping the pressure on prices in much of the country, while high land prices, labor shortages, and restrictive land use policies limit development of moderate-cost housing."

Predicting a recession is not difficult. Sooner or later, the U.S. will experience another one. And as in the past, for investors it may be the best of times or the worst of times.