Does our last recession tell the story for what will happen to home prices in the next recession? You might be surprised to find out that the next recession could be different.
A recent report from a title insurance company, First American Financial Services, discusses how it is likely that the U.S. housing market will remain resilient in the next recession. Most experts predict the next recession is not coming any time soon, but this news is certainly welcome. First American Financial Services used its own data along with additional information from Freddie Mac and the National Association of Realtors to illustrate how the housing market has been impacted in past recessions, pointing out how the housing market has typically remained strong.
What Will Be Different?
In the last recession, you had an increase in access to mortgage credit which opened the door to home ownership for more people who had less equity in their homes. Construction also produced more homes which reduced home values when the recession hit. These factors combined with job losses to create the severity of the last recession and its impact on housing prices.
Our current economic expansion has led to home price growth and more homeowners with greater equity in their homes. Contrasted to the last recession, this increase in home ownership is not attributed to an increase in mortgage credit access. With strong homeowner equity in place and the current housing supply shortage, the housing market is expected to be more resilient with fewer homeowners at risk of going underwater on their loans.
“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. 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.”
– Odeta Kushi, the author of the report and deputy chief economist at First American
As is usually the case, there will be some regional differences and some regions could be less resilient than others. Regions with a higher concentration of homeowners who have defaulted since the last recession would be more vulnerable to downturns triggered by job losses.
“On the whole, homeowners have very high levels of tappable home equity today, providing a cushion to withstand potential price declines,” Kushi writes. “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.”