The U.S. May Already Be in a Recession: Will the Housing Market Collapse Again?

 By Clare Trapasso | Realtor.com

The economy is shrinking. Inflation is soaring, and the stock market is losing value. Searches for “Is the U.S. officially in a recession?” are now trending on Google. If the nation isn’t already in a recession, it might well be on the precipice of one. And it’s left those with PTSD from the Great Recession of the late aughts wondering if another downturn could sink the hot housing market as well.

The last time around, housing was largely to blame for the most prolonged, financial bloodbath in recent memory. When the bad mortgages imploded, the nation was left with scores of foreclosures, countless new homes sat empty, and millions of Americans suddenly found themselves financially underwater. Unemployment soared. Businesses shuttered.

Most Americans don’t want to experience a repeat of those 18 months of misery. The housing market’s meteoric rise over the past two-plus years, with soaring prices, bidding wars, and an influx of investors, has drawn plenty of parallels to that earlier ramp-up period. However, this time the housing market won’t be the cause of any downturn—and might even help nudge the nation out of one.

“Housing leads the economy,” says Robert Dietz, chief economist of the National Association of Home Builders. “Housing is often the first sector to experience weakness during a recession, but it’s often the first sector to rebound as well.”

Most real estate experts do not think the housing market is in a bubble or is a threat to the sputtering economy, despite home prices rising nationally by more than 31% in just two years. (The Realtor.com® median list price data is from June 2020 to June 22.) This time around, there are far more buyers in the market than there are homes available—a complete reversal of what happened in the 2000s. Bad mortgages have mostly been eradicated. Lenders have much tighter qualifications for borrowers.

But that doesn’t mean the economy is recession-proof. Typically, two quarters in a row of negative U.S. gross domestic product, aka GDP, portends an economic downturn. GDP dropped 0.9% in the second quarter of the year, preceded by a 1.6% drop in the first quarter, according to the U.S. Commerce Department. (The latest GDP report was released on Thursday by the U.S. Commerce Department.)

However, unemployment is still very low, at just 3.6% in June, according to the U.S. Bureau of Labor Statistics. Despite more companies rolling out hiring freezes and laying off workers, there are plenty of others still jockeying for employees. If the nation was in a recession, many more people would likely be out of a job—and businesses wouldn’t be complaining they can’t find enough candidates to hire.

“Recessions tend to coincide with shrinking economies. We have seen some shrinking,” says Realtor.com Chief Economist Danielle Hale. However, she points out that it’s a very mild contraction. When the data is revised, which typically happens each quarter, the GDP might even be positive. “We haven’t seen job losses yet, which is why whether we’re in a recession is up for debate.”

U.S. Federal Reserve Chair Jerome Powell has said the nation isn’t in a recession, a sentiment echoed by President Joe Biden.

“I do not think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well,” Powell said at a press conference on Wednesday.

The National Bureau of Economic Research’s Business Cycle Dating Committee, and the eight economists who sit on it, is the official arbiter of whether the economy has entered into a recession. It has yet to make a determination.

“We’ll wait and see,” says Hale. Whatever happens, “I don’t expect another housing crash.”

The housing shortage is just too severe as there are far more people looking for homes to buy and rent than there are homes available. The mortgage industry also did crack down on loans that balloon in size or were designed for homeowners to default on. And only very qualified buyers, with steady, verified income, can qualify for mortgages.

Even if a downturn comes to pass, economists don’t expect to see the widespread unemployment that was a hallmark of the Great Recession. They also expect it to be a relatively brief recession. That means there won’t be scores of homeowners who can no longer pay their mortgages. Those who are struggling might choose to sell their homes, potentially even for a profit they can pocket, rather than lose them to foreclosures and short sales.

Without a lot of cheap homes flooding the market, home prices should remain strong.

“I don’t expect a ton” of foreclosures, says Hale. “The housing market was very different during the Great Recession.”

That doesn’t mean the market isn’t undergoing seismic shifts in the meanwhile.

As mortgage interest rates have steadily been climbing into the 5%-plus range, many tapped-out homebuyers are taking a step back. Some can no longer qualify for a mortgage large enough to buy the kind of home they’re seeking. Others can’t afford the higher rates and higher prices or don’t want to buy at the peak of the market. And some are so worried about a recession that they’re taking a wait-and-see approach.

The result is fewer homes are selling, bidding wars are dissipating, and offers over the asking price are dropping. Many sellers have been forced to slash their prices. And home inspections and contingencies are back.

If the economy goes bust, mortgage rates are expected to fall again. That should bring buyers who remained employed back into the housing market. When home sales tick up, it will give the overall economy a boost. That could help the nation claw its way out of a recession.

“In today’s housing market, we have a decade’s worth of underbuilding, which means there’s a lot more demand than supply,” says Hale. That imbalance should keep home prices stabile. “It’s unlikely we will see big home price declines like we saw in the late 2000s.”


Clare Trapasso is the deputy news editor of Realtor.com where she writes and edits news and data stories. She previously wrote for a Financial Times publication, the New York Daily News, and the Associated Press. She also taught journalism courses at several New York City colleges. Email clare.trapasso@realtor.com or follow @claretrap on Twitter.

%d bloggers like this: