Will Your Home Lose Value in a Recession?

The big ‘R’ word: We’ve been hearing it tossed about through gritted teeth for months now. As the Federal Reserve has steadily hiked interest rates in its efforts to curb inflation, the unfortunate consequences may be that the economy takes a cold bath in a prolonged downturn. 

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Many economists agree that a recession is indeed where we’re headed. The IMF’s most recent outlook, published in October, predicts that global growth will slow from 6% in 2021 to 3.2% in 2022  to 2.7% in 2023. This would be the weakest growth since 2001, outside of the global financial crisis and the acute phase of the COVID-19 pandemic, the IMF said.

Signs supporting what could play out as a self-fulfilling prophecy keep coming: The tech sector is leading a tightening in the labor market, with heavy layoffs sweeping Amazon, Microsoft, Google and others. Indicators like rising gas prices, slowing home and auto sales and the price of copper (considered a bellwether metal also provide fodder for such predictions. 

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What does that mean for your home value?

It’s Not the Great Recession

“Say the word ‘recession,’ and everyone immediately thinks back to [2008], which was a horrendously deep recession,” said Matthew Gardner, chief economist at Windermere Real Estate

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That recession, of course, was driven by the housing market, when hugely inflated home prices combined with a proliferation of subprime mortgages offered to high-risk buyers with lower credit scores ultimately collapsed the market. Home prices across the US dropped 33% in the recession following the housing bust, and 10 million people lost their homes to foreclosure.

“We all remember the [2008] recession because it affected so many of us, because it was driven by housing,” Gardner said. “This time around, it will not be a housing-induced recession. People buying homes throughout COVID are well-qualified. Our down payments were higher, our credit quality was immensely higher, and those old liar loans that were basically just cheating don’t exist anymore.” 

What Kind of a Recession Is It? 

The housing market has been running hot over the last several years, especially as historically low mortgage rates and increased mobility among the white collar desk set fueled home sales during the pandemic. Nationally, the median home sale price in December 2022 was $366,900, up 2.3% year over year, according to data from the National Association of Realtors.

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Patrick Duffy, principal at the economics and real estate consulting firm MetroIntelligence, said that if we do go into a recession, it’s likely to be not only shorter and milder but more targeted to local economies.

“I’ve seen that we might be having what you’d call a ‘rich-cession,'” Duffy said. “We’ve been having all these tech-related layoffs, so that might disproportionately impact markets like Seattle and San Francisco or financial centers like New York.” 

Gardner predicts that anything that happens this year will be more akin to the recession of 1990, which was far less memorable.

“It was fairly modest and not really that exciting,” Gardner said. “Will there be job loss? Yes. Will banks further tighten their lending policies? Yes. But lending policies today are remarkably stringent anyway, so I don’t see a massive negative impact.” 

What Does That Mean for Your House? 

Outside the Great Recession, home prices have been generally stable through recessions, going back to the 1960s and earlier, Gardner said. Given the current landscape, with mortgage rates around 6%, he doesn’t expect to see much movement in real estate. Many homeowners are happy with rates they have locked in at around 3% or lower, providing good reason to stay put for now. 

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What’s more, even in a cooling market, many homeowners are already sitting on significant amounts of equity. According to data from CoreLogic, homeowners on average saw their equity go up 15.8% in the third quarter of 2022 , with an average increase of $34,300. That was a significant slowdown from the previous quarter’s gains of $60,000 annually, and CoreLogic predicts that home price gains will continue to relax.

Still, Selma Hepp, interim lead of the office of the chief economist at CoreLogic, said there’s no reason to be alarmed. 

In a December press release on homeowner equity, Hepp said, “At 43.6%, the average U.S. loan-to-value (LTV) ratio is only slightly higher than in the past two quarters and still significantly lower than the 71.3% LTV seen moving into the Great Recession. … Therefore, today’s homeowners are in a much better position to weather the current housing slowdown and a potential recession than they were 12 years ago.”

Location, Location

The biggest contractions in home values could occur in places that experienced explosive growth in recent years, such as the so-called “Zoom towns” people flocked to once they weren’t tethered to their physical office spaces during the pandemic, buying up properties and driving up prices.

“The biggest question is returning to the office versus working from home,” Duffy said. “If CEOs are wanting people back in the office, that’s great for people in the suburbs but not great for those people who moved several states away, like Idaho, or those who bought in a vacation market like Palm Springs thinking they’re going to be able to work there forever.” 

In the end, it’s all about demand. 

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About the Author

Cody Bay is an award-winning writer, editor and media ace based in Seattle, WA. With a focus on social good storytelling and content strategy, she recently led the Microsoft News for Good initiative at MSN, creating content experiences to inform and empower readers to take action on the causes they care about. She has contributed to a wide variety of local and national publications, including Microsoft’s IT Showcase, The Seattle Times, Seattle magazine, The Travel Channel and the Puget Sound Business Journal, and was previously a multimedia editor at The Associate Press in New York.
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