Key highlights from this report:
- Many economists agree that the U.S. is entering a recession.
- The coronavirus has caused a global economic slowdown.
- But home prices don’t always drop during a recession.
- Home prices in the U.S. might just level off, instead of falling.
- Much depends on how long the 2020 recession drags on.
Will home prices in the U.S. drop during the 2020 recession caused by the coronavirus?
That’s one of the most common questions we’ve received from our readers over the past week or so. It seems that a lot of homeowners across the country are concerned that an economic slowdown or recession will cause home prices to fall nationwide.
And those are valid concerns. After all, most people alive today still remember the Great Recession of 2008 and 2009 and the economic pain that it caused. Unemployment skyrocketed. Businesses failed. And home prices in most U.S. dropped as the recession dragged on for well over a year.
But does it always work that way? Do home prices always drop during a recession?
The answer is no, not always. It largely depends on how long the economic downturn lasts, and how severe it is. And we don’t yet know the answers to those questions.
Definition: According to the National Bureau of Economic Research, a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Surprise: Home Prices Don’t Always Drop in a Recession
The chart below was created by the Federal Reserve Bank of St. Louis and is based on home-price data provided by S&P Dow Jones Indices. It shows the rise and fall of home prices in the U.S. dating back to the 1980s.
It also shows our last three economic recessions, represented here by the vertical gray bars. The widest bar on the right represents the Great Recession, which spanned from December 2007 to June 2009 (roughly).
The other two narrower bars show the other two recessions that have occurred within the last 30 years or so. Both of those were about eight months in length — shorter and shallower than the “Great” one of 2008.
A few things should jump out at you, based on this chart:
- U.S. home prices dipped slightly during the 1990 – 1991 recession, and then began rising gradually again once the economy rebounded.
- The next time around, during the 2001 economic recession brought on by the dot-com bubble collapse, home prices in the U.S. didn’t drop at all. They kept rising right through the downturn. (That’s the middle of the three gray bars.)
- The wider bar on the right is a different story. During that time, home prices started dropping before the U.S. and global economies went into a recession. In fact, the drop in home values (and the broader housing market collapse) was partly what caused the Great Recession.
That brings us up to today.
Are we about to put another “gray bar” on the chart? Is the U.S. entering another recession, brought on by the ongoing coronavirus pandemic? It seems likely.
In fact, many economists have already declared that a global economic recession is occurring now. And a growing chorus of experts are now saying that the U.S. is entering such a downturn as well.
Last week, Bank of America’s chief U.S. economist Michelle Meyer stated:
“We are officially declaring that the economy has fallen into a recession … joining the rest of the world, and it is a deep plunge.”
But does that mean we’ll see a drop in home prices, as the coronavirus continues to wreak havoc on the U.S. and global economies?
Surprisingly, that’s a hard question to answer. History does not show a direct correlation between economic downturns and home-value declines. You can see that clearly in the chart provided above.
It’s also important to realize that local housing markets (at the city, county and state level) behave differently from one another. Some could cruise through the current crisis with little damage, while others could decline.
Some Housing Markets Are More Vulnerable Than Others
Will home prices in the U.S. drop during the 2020 recession? It’s possible. But such a scenario would likely play out in a regional way, with some local housing markets faring better than others.
In September 2019, we shared a study by the national real estate brokerage Redfin that showed which U.S. housing markets would be most vulnerable to price erosion during the next recession. (We now appear to be entering the “next” recession mentioned in that article, making that story more relevant.)
The company’s research team singled out the following real estate markets as being most at risk of a downturn:
- Riverside, California
- Phoenix, Arizona
- Miami, Florida
If you know your real estate and economic history, these three cities will ring a bell. They were among the hardest-hit cities during the housing market crash that started in 2007 – 2008.
To quote the Redfin report from September 2019:
“Regardless of when [the next recession] comes, it’s unlikely to have a large negative impact on the real estate market. However, there are some metro areas that are more at risk of a housing downturn than others. Riverside, Phoenix and Miami have the highest risk of a housing downturn in the next recession…”
To determine which cities would be most likely to see a drop in home prices, Redfin analyzed seven housing and economic factors for the nation’s 50 largest metros. They looked at home-price-to-income ratios, local employment conditions, the frequency of property “flipping” and other factors.
The question is, will history repeat itself?
Long-Range Outlook Is a Mixed Bag
The quote above reflects our own outlook for the U.S. real estate market through the second half of 2020. At this stage, we do not expect to see a major decline in home prices nationwide.
The nation’s median home price will likely slow down in the months ahead, and might level off. But a sharp decline seems unlikely based on current conditions.
But some local housing markets could see a drop in home prices as we enter an economic recession. This would likely occur in the more expensive real estate markets, where a relatively small percentage of residents can afford to buy a home.
The media often talk about “the” U.S. real estate market, as if there’s only one. It’s more accurate to think of it in terms of local “micro markets,” each with its own unique characteristics. Supply and demand, employment, affordability — these factors can vary greatly from one city to the next.
So the housing-related effects of an economic recession will be something of a mixed bag. Home prices could fall in some cities, but merely rise more slowly in others. There’s a broad spectrum in between.
Disclaimer: Economic and housing forecasts are the equivalent of an educated guess and should be treated as such. No person or organization can predict future market conditions with complete accuracy.