The U.S. economy has experienced its share of prolonged economic downturns. In fact, many of us might remember the Great Recession, which lasted from 2007 to 2009.
During that time, unemployment levels soared while home values bottomed out. And so back then, it was a tough time to be a homeowner and real estate investor.
Meanwhile, right now, the housing market is sizzling hot. Home prices are still sitting near record highs, and buyer demand is soaring.
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But an economic recession could bring some very big changes to the housing market. Here's what could happen if the economy takes a notable turn for the worse.
The red-hot market could finally cool off
There are different benchmarks used to define a recession, but often, it's marked by a period of high unemployment. Sometimes, stock values will plunge during a recession, though that doesn't always happen. Similarly, home values can plunge during a recession, but the extent to which that happens may hinge largely on factors like borrowing rates and buyer demand.
If the U.S. economy enters recession territory -- something some financial experts have been warning could happen -- it might help drive home prices in a downward direction. But that's not necessarily a bad thing.
As of late March, home prices were up 15% on an annual basis, per the National Association of Realtors (NAR). That means there's lots of room for home prices to come down without creating a crisis situation that leaves millions of homeowners underwater on their mortgages.
The main reason home prices are so inflated right now is that inventory is low and demand is high. If a recession were to hit, it could result in lessened demand -- especially if mortgage rates stay as high as they are right now, or keep climbing. And that could, in turn, bring home prices down to more moderate levels.
But unless housing inventory really picks up soon, we're unlikely to see a catastrophic drop in home prices because supply is still so incredibly low. As of the end of March, there was only a two-month supply of available homes on the market, according to the NAR. That's well below the four- to six-month supply that's normally found in an equalized housing market.
Because inventory is so low right now, even a notable drop in buyer demand shouldn't result in a housing market crash. If anything, what it might do is open up the housing market, allowing financially secure first-time buyers to finally have a shot at owning property as well as real estate investors to scoop up income properties more affordably.
Should homeowners be worried about a recession?
Right now, homeowners are sitting on record levels of equity. But even if a recession hits and home prices drop, they shouldn't fall to such low levels that equity is wiped out.
In fact, because the housing market still sorely lacks inventory, a near-term recession could actually end up minimally impacting home values. That's something current property owners can take comfort in.
