Is the U.S. Tipping Into a Recession? The Answer Will Determine the Direction of the Housing Market

Whether the nation is in a recession, hurtling toward one, or will narrowly avoid it altogether, whatever is going on in this uncertain, rocky economy is giving many would-be homebuyers and sellers pause.

There is no shortage of ominous economic signals. Bank collapses, stock market declines, and news of high-profile tech companies shedding workers are unsettling—especially for those getting ready to make what could be the largest purchase of their lives. But super-low, national unemployment is encouraging, and still-strong home prices would suggest the nation is, at the very least, in an economic holding pattern.

So what happens if more of the primary economic indicators start definitively moving south? What would it mean for a housing market already battered by escalating mortgage rates over the last year?

“We need to accept and understand the economy today is very different than the economy over the last three years,” says Ali Wolf, chief economist of Zonda, a building consultancy.

If there aren’t any other banks falling apart or problems in the economy, then the nation could skirt a recession or experience a mild one. However, if other dominoes fall, all bets are off.

Most experts predict a period of continuing change.

“The stock market and the real estate market are going to be volatile,” says David Sacco, an economics professor at the University of New Haven in Connecticut.

The Federal Reserve has intentionally tried to slow the U.S. economy and the housing market, with multiple rate hikes in its quest to curb runaway inflation. But if the Fed doesn’t achieve its aim of a “soft landing” for the economy, the ensuing downturn could be unlike any seen before.

Homebuyers have tenuously returned to the market this spring, as homes prices dipped in certain parts of the country and mortgage interest rates ticked down a little from a high of more than 7% last year. Yet the bank failures and the number of layoffs ratcheting across industries could cause nervous buyers (and sellers) to retreat to the sidelines, plunging the housing market back into a freeze.

“The path for a soft landing has narrowed even further because of the recent banking situation,” says Keith Gumbinger, a vice president at HSH.com, a mortgage information website. “We don’t know the final repercussions; we don’t even know if the whole thing has unfolded yet. That’s certainly going to be something of concern.”

And widespread concern generally doesn’t translate into major growth in the real estate business.

“Before committing to a 30-year mortgage, people want to have confidence that they’re going to have a job and the income needed to meet their obligations,” says Realtor.com® Chief Economist Danielle Hale. “So far, the jobs market is resilient, but headlines about bank failures have to have made a dent in that confidence. The question on the table is, how big is the dent?”

Will mounting layoffs scare off potential homebuyers?

The seemingly endless stream of companies announcing layoffs—including Disney, Amazon, Meta, Alphabet (Google), and recently even the job-listing website Indeed.com—could be damaging to the housing market. Those without steady jobs and folks worried about their job security aren’t likely to be purchasing new homes.

The unease could also worsen the housing shortage. As most sellers are also buyers, they could decide to stay put rather than trading up or down—or moving to another part of the country as they ride out the economic storm. That can lead to fewer options for buyers, particularly first-timers seeking property on the generally cheaper, resale side of the market.

“Jobs drive housing demand,” says Wolf, of Zonda. “So if you start seeing more people losing their jobs, you should see lower housing sales. And you may see some people who are forced to sell.”

Many of the layoffs have been concentrated in the tech industry, which most economists believe over-hired during the pandemic.

“The employment market is millions of jobs,” says Gumbinger, of HSH.com. “While we do see some high-profile layoffs, we haven’t seen the widespread job losses which would necessarily be a precursor to a downturn.”

Even as job losses rise—and many experts warn that layoffs are likely to become more widespread in the coming months—economists urge folks not to panic.

“Remember we are still at a near-historic, low unemployment rate,” says New York University economics professor Lawrence J. White. “This is not the over 10% level we saw briefly in 2020 and what we saw shortly after the 2008 financial crisis.”

If mortgage rates fall, the housing market could get a boost

One potentially advantageous side effect of a recession: It usually causes mortgage rates to fall. The Fed will typically try to jumpstart the economy by lowering its own rates, which generally leads to mortgage rates following suit. That could make homeownership more affordable to potential buyers who are still employed.

Plus, if there are fewer buyers battling it out in the market, then prices could dip.

Mark Zandi, the chief economist at Moody’s Analytics, previously told Realtor.com that if there is a recession, he expects prices to decline 20% from their peak last summer.

The exact amount will vary depending on the market. Already, prices are tumbling in the hottest pandemic-era markets, such as Austin, TX; Las Vegas; and Phoenix.

If prices and rates come down a little more, that could be all the incentive many homebuyers need to wade back into the market.

“There is a risk that people will be concerned when they hear news of economic uncertainty, but overall there is so much pent-up demand as people have been waiting out the market,” says Lisa Sturtevant, chief economist of Bright MLS, the multiple-listing service for the mid-Atlantic region.

Will there be another foreclosure crisis?

For many, thoughts of a recession are synonymous with the painful days of the late 2000s.

During the Great Recession, many Americans lost their homes to short sales and foreclosures, and vacant homes became a familiar sight in neighborhoods across the nation. That influx of cheap housing forced home prices down even further and left scores of homeowners owing more on their homes than they were worth.

However, real estate experts don’t expect another foreclosure crisis this time around. When the last housing bubble burst, there were far more homes for sale than buyers to snap them up. The reverse is true this time, exacerbated by a national housing shortage.

Additionally, the mortgage system isn’t built on a house of cards. In the wake of the crash, safeguards were put into place to ensure only the most qualified borrowers received loans. And the most problematic mortgages—subprime loans—were largely eradicated.

So while some homeowners who lose their jobs might be unable to pay their mortgages and will ultimately lose their homes, the majority of homeowners are likely to weather a downturn.

The market “will be uncertain and chaotic,” says Aaron Brown, an adjunct finance professor, and Bloomberg columnist. “[But] I don’t think we’ll get anywhere near as bad as 2008.”

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