As recession fears mount, here’s why home prices may not plunge alongside the stock market

Markets have declined sharply in recent weeks thanks to the global coronavirus outbreak, and now the threat of an oil price war has investors even more concerned. But even with the specter of a recession mounting, homeowners may not need to worry much about their home values falling in line with the stock market, a recent report argues.

See also:Here’s how the plunging stock market could cause a recession

Researchers at First American Financial Services
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a title insurance company, recently examined how the country’s housing market has fared historically during recessionary periods. Based on what’s happened in past recessions First American’s report argues that the next recession is unlikely to prompt a major downturn in housing.


‘The housing market may actually aid the economy in recovering from the next recession — a role it has traditionally played in previous economic recoveries.’

“While the housing crisis is still fresh on the minds of many, and was the catalyst of the Great Recession, the U.S. housing market has weathered all other recessions since 1980,” wrote Odeta Kushi, deputy chief economist at First American and the report’s author. “In fact, the housing market may actually aid the economy in recovering from the next recession — a role it has traditionally played in previous economic recoveries.”

Read more:The coronavirus outbreak is making it harder for some Chinese investors to buy U.S. real estate

Home price appreciation continued during previous downturns

Using its own data along with information from Freddie Mac
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and the National Association of Realtors, the report maps out how the housing market has traditionally fared in economic downturns. In most other cases, home price appreciation continued at an even pace, and existing-home sales growth only edged downward slightly, Kushi wrote.

On average, U.S. house prices fell approximately 33% during the Great Recession

So what made the Great Recession different? The housing boom that preceded the last recession was largely driven by an explosion in both home-building activity and mortgage credit. Home buyers were able to get mortgages with no documentation of their income and no down payment, and many loans had introductory 0% interest periods that made them cheap to start but more expensive as time wore on.

These homeowners were over-leveraged. “The housing crisis in the Great Recession was fueled heavily by the fact that job loss was paired with a significant share of homeowners who didn’t have much equity in their homes,” Kushi wrote.

And because developers had constructed so many new homes, home values quickly sank when the bubble burst, exacerbating the situation further.

The recent growth in home prices has been fueled by different factors than in the past

The growth in home prices seen during the current economic expansion has not been fueled by increased access to mortgage credit. Rather, it’s a simple reflection of supply and demand: Many Americans want to become homeowners, but the supply of homes available for sale is very low, pushing prices upward.

Also see:Will 2020 be a good year to buy a home? Here’s what the experts say

While this has made the prospect of buying a home unaffordable for millions of Americans, it has also meant that those who are homeowners have seen their home equity grow substantially in recent years. That decreases the likelihood that they would be underwater on their loan if home prices were to dip in a recession.

“Were we to have a recession, I’d argue housing would provide a cushion because the shortage of supply at the entry-level suggests builders could actually continue to build,” Doug Duncan, Fannie Mae’s chief economist
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told MarketWatch in December.

Homeowners should stay alert to some potential red flags

There still are red flags that homeowners should be on the lookout for when it comes to how a potential recession could affect the housing market. For starters the significant decline in the stock market in recent weeks could weigh heavily on consumer sentiment, analysts say, and that could reverse growth in home construction and sales.

“Because confidence closely ties to the equity market there being no greater statement of confidence than buying that first home, the sharp drop in equities most assuredly will reverse positive trends in housing,” TS Lombard chief U.S. economist Steve Blitz wrote on Sunday.

Also a significant number of homeowners in the U.S. have taken out cash-out refinance mortgages on their homes as their home values have grown. That’s whittled away the equity these people have in their property leaving them more vulnerable to owing more than their home was worth in the potential event home prices drop.

Another issue: Many Americans who fell behind on loan payments and modified their mortgages in the wake of the recession to avoid foreclosure have since redefaulted. Were these people to lose their jobs in a recession they could easily fall into foreclosure. Research has shown that foreclosures exacerbate economic downturns — and they can have a ripple effect through a local market causing other homes to drop in value.

And at the local level certain local housing markets could prove more resilient in the event of recession depending on the strength of the local economy relative to what’s going on at a national level.

This story was originally published on Feb. 7, 2020 and updated on March 9, 2020.

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