How Will a Recession Affect Real Estate?

There’s a lot going on in the marketplace, so today I want to update you on what’s happening with interest rates, real estate, and the recession. 

Inflation has been a big buzzword recently and is over 8%, as measured by the consumer price index. Although it may peak over the summer months, we expect inflation to pull back this fall. Remember that inflation is the archenemy of interest rates. Mortgage payments are typically fixed, so inflation chips away at the buying power of this money. The only way for investors to combat this is to offer higher interest rates. 

There has also been a lot of talk about the Federal Reserve. We expect them to raise rates throughout the year, and counterintuitively, the Fed raising rates does not mean interest rates will climb. Historically, the Fed rate increases have the opposite effect. The only unknown element is the Fed’s $9 trillion balance sheet.

Are we still headed for a recession? We think we are. As buyers, you need to know what this means for you in terms of interest rates and home values. As a quick recap, every time the Fed raises rates, the economy slows, inflation drops, and mortgage rates decline. As part of this pattern, there’s almost always a recession.  

Another number you want to watch out for is the unemployment rate. When unemployment reaches its lowest point and starts to rise, there’s often a recession. Right now, we have very low unemployment, and when it starts moving up again later in the year as the rate hikes take effect, we should see a recession. 

What does a recession do to interest rates and real estate? We consistently see interest rates drop when we enter a recession. Many people think that home values will drop when we enter a recession, but that’s not necessarily true. Historically, home prices have done very well every time we’ve had a recession. 

The one exception is the housing bubble in 2007. In that case, bad lending practices caused the recession and the following home price drop. The market today is much stronger than it was then. We have historically low inventory, much higher demand, and stricter mortgage lending oversight. 

It’s still a great time to buy. While you can always refinance your mortgage rate later, you can’t do the same with home prices. 

If you have any questions, or if I can help you in any way, please call or email me. I’d love to hear from you.