How Will a Recession Affect the Housing Market?

Before the COVID-19 pandemic changed everything, many experts predicted the U.S. would see a recession at some point in 2020. Following the end of the second quarter last year, the 2019 Zillow Home Price Expectations Survey reported that many of the surveyed economists, investment strategists and housing market analysts pointed to trade policy, stock market correction or geopolitical crisis as the likeliest causes.

Of course, no one foresaw a global pandemic as the cause of economic woes. Quarantines and shelter-in-place orders in the U.S. began in March, and companies have been forced to shift to work-from-home models as much as possible while customer-centric businesses are seeing far fewer patrons than is sustainable in the long term.

Even as states attempt to slowly open up for business, many people are still afraid to return to work, gather in large groups and patronize stores and restaurants in person. While homes have been bought and sold throughout the pandemic, housing market activity has dropped, leaving many people wondering how housing and the overall economy may be changed going forward.

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Are We in a Recession Right Now?

A recession is a period of significant economic decline, often when a country's gross domestic product is reduced for at least two successive quarters.

The National Bureau of Economic Research determines when a recession begins and ends, and those parameters are typically set after a recession has ended. In its determination, the NBER factors in indicators beyond real GDP and looks at monthly activity as opposed to complete quarters.

Economic forecasters at real estate information company Zillow and other firms predict that the U.S. is currently in a recession, explains Skylar Olsen, senior principal economist at Zillow. Still, a definitive answer as to whether we are in a recession and how long it will last can't be known yet.

Unemployment's Impact on Housing

The Bureau of Labor Statistics reports the national unemployment rate reached 14.7% in April, the worst unemployment rate since the Great Depression. Many states' individual unemployment rates are the highest in history.

In a traditional recession, the housing market is temporarily affected by increased unemployment, with home prices decreasing slightly until buyers feel confident enough to resume house hunting. In this period of economic uncertainty, signs point to a similar reaction, though the sheer size of unemployment can drag out decline in the housing market.

If more states begin to open up and unemployment drops quickly as businesses are able to bring employees back from furloughs and rehire laid-off workers, the pandemic could register as a minor blip in homebuyer activity, homeowner confidence and home prices. But if high unemployment rates are prolonged, housing market activity is likely to remain low for longer, and more would-be buyers will put off their plans to purchase.

Employment plays a major part in your ability to qualify for a mortgage. If you were set to purchase a home but suddenly lost your job, your employment history no longer looks as secure. You may have to rely on the savings you had for a down payment to cover other expenses. In this scenario, Olsen says, the question becomes, "Does that reset your clock for buying a home another two years?"

The Housing Market in the Near Future

While the housing market saw a major drop in activity when stay-at-home orders went into effect throughout the U.S., the good news is that home prices continue on an upward trend compared to last year. The National Association of Realtors reports that the median price for existing homes in April was $286,800, a 7.4% increase from April 2019. The number of sales of existing homes that closed in April, however, was 4.33 million, a 17.8% decline from March and a 17.2% drop from April 2019.

Buyers who remain financially secure are starting to shop for homes again. The American Enterprise Institute Housing Center reports that for the week of May 18, the volume of home purchase rate locks -- or homebuyers locking in an interest rate to make an offer on a home -- returned to pre-pandemic levels and is up 16% compared to the same week in 2019. Sellers, on the other hand, largely aren't putting their homes on the market.

"Buyers might be showing up and they're harvesting what's out there, (but) we won't see this continue unless we start seeing new listings," Olsen says.

In the rental market, affordability concerns are strong, as these households are more likely to be harder hit by unemployment and less likely to have ample savings to fall back on.

Rental industry experts were pleasantly surprised that by May 20, 90.8% of apartment households in professionally managed rentals had paid at least partial rent for the month of May, according to the National Multifamily Housing Council's Rent Payment Tracker. Only 89.2% of renters were able to make April's rent by April 20.

NMHC President Doug Bibby points to legislative efforts that have made May a more successful month. The coronavirus relief bill resulted in a check of $1,200 to all Americans with an adjusted gross income of $75,000 or less and increased unemployment benefits by $600 per week for roughly four months. "A combination of the stimulus check and the unemployment benefits are helping people," Bibby says.

Congress is currently weighing options for more financial relief, though who will benefit and how is not yet determined. Without additional government aid in the near future, Bibby expects rent payments to fall significantly if unemployment remains high. "It's really getting into July and August that I become very nervous for prospects for renters," he says.

Ultimately, renters' financial limits will likely keep rents from growing. "You'll start to see rent coming down, but you'll also see people seeking rent-saving strategies," Olsen says. Such strategies include renters opting to move back in with their parents or living with additional roommates for a year or more to keep their housing affordable.

[Read: How to Buy a Foreclosed Home]

Homeowners and Renters Shouldn't Worry If They Can Make Payments

For a typical homeowner or renter, the biggest concern should not be about what's happening in the larger market, but their own ability to make monthly housing payments.

If local home prices drop and you find yourself underwater -- meaning you owe more on your home than it is currently worth -- the change in value should be minor and temporary. There is no reason to try to sell your home in a panic unless you can't continue making existing payments.

Even then, your mortgage lender has likely offered options in recent weeks to help you avoid foreclosure if you find yourself without income. The coronavirus aid bill has additionally put a hold on foreclosure activity for federally backed mortgages through forbearance. When a mortgage is in forbearance, the lender will not pursue foreclosure proceedings for a set period of time, allowing the homeowner to suspend payments and potentially work with their lender to establish a new payment plan. In many cases, borrowers are able to extend the life of their loan by the number of payments skipped during forbearance.

In a recession, the number of foreclosures nationwide typically increases. However, the legislative measures and lender accommodations are helping stave off a widespread foreclosure problem while unemployment is so high. "The CARES Act being there in order to stop foreclosures, and to do forbearance -- that's how you get to the other side (of a recession)," Olsen says.

For renters and homeowners who are worried about making payments, communication is key. For landlords and lenders, flexibility when possible will help avoid a housing crisis. "People are going to have to work together to schedule a payment plan," Bibby says.