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Recession Doesn’t Equal Housing Crisis

In the coming months, you’re going to start hearing a lot of talk about how a recession will negatively affect the housing market. I wanted to give you some facts because apparently, we live in a world where sensationalization and “clickbait” news articles are now the norm.

I recently attended a financial services seminar where they discussed several topics, including real estate. The presenter provided some excellent slides with fact-based information that I thought was worth sharing with all our clients. All the information was supplied from well respected companies like CoreLogic, the New York Federal Consumer Credit Panel, Equifax, and the Federal Reserve.

In the coming weeks, I will share more details of the material that was presented, but today I’d like to simply focus on one subject only. The discussion of what is a recession and how does it affect home values in the U.S. real estate market.

Economists have varying opinions about how to define a recession. The National Bureau of Economic Research (NBER) defines a recession as a significant decline that lasts for more than a few months and affects the broader economy, not just a particular sector. In other words, almost every industry will experience its impact. Recessions are also defined as the period between the peak of a countries economic activity and the economy’s lowest point. They’re usually relatively brief. Since World War II ended, the average recession has lasted 10 months.

When the economy is in a recession, incomes stagnate or drop due to employers slashing hours or reducing their workforce. Income inequality may also worsen, as the wealthy are often less impacted by a recession than the middle or lower classes. Also, in response to the rising cost of raw materials, businesses usually cut back on production during a recession, and manufacturing activity declines. This change can lead to a decrease in exports and an overall decrease in economic activity. This is why recessions are often tied to the U.S. GDP (gross domestic production) figures.

A recession is typically defined as two consecutive quarters of economic contraction—declining real GDP. The nation’s GDP fell 1.6 percent on an annualized basis in the first quarter of 2022 and was followed by a 0.9 percent drop in the second quarter. To be quite honest, these percentages are barely a blip on the radar and so low in fact, that some economists argue whether this will actually negatively affect the overall economy. Almost all of them will agree that it’s not going to drastically affect the housing market in the U.S.

To be clear, a recession does NOT equal a housing crisis! As a matter of fact, during the last 6 recessions in the United States, housing prices continued to rise in four of them (1980, 1981, 2001, and 2020). During the 1991 U.S. recession, home prices only dropped by 1.89% and in 2008 a decline in home prices actually caused that recession, not the other way around.

If you have questions about this or simply want more detailed advice specific to your own situation, (buying or selling) I would love to speak with you. Feel free to call me at 816-651-9001.

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