Does an economic recession mean a housing crash is imminent?

Our most recent economic recession in 2020 was short-lived, self-induced and seemed to coincide with an anomaly in housing demand not only in the Denver metro area, but also nationally. It had essentially no negative impact on the housing market so most of us don’t even call it a recession in our minds. What we all remember very well however is the Great Recession of 2008 where housing prices tanked while loan defaults and housing inventory skyrocketed. For many of us, that was a very real and very scary time. When we hear “recession” we automatically think of 2008. Because of that experience, “recession” and “housing crash” became synonymous terms and future simultaneous events. With one comes the other. So of course, with increased talks of a pending recession from economists to the media, everyone is wondering if a housing crash is imminent as well.

But is that how recessions typically play out?

Historically, only 2 out of the last 6 recessions experienced a decline in average home prices. We know about 2008 where we saw an average drop of 19.7% in values. We also saw a very minimal dip of 1.9% in 2001. During every other recession in recent history, home prices on average rose! So, no, a recession doesn’t equate to a housing crash.

Weve seen that mortgage interest rates during a recession typically decline, making debt cheaper, and therefore home purchases more affordable. Couple that with an already tight home inventory, a desirable place to live, and steady demand of people needing housing in the Denver area and Colorado front range (demographics are driving this), and we’ll most likely see home prices stay steady, even increase, just not at the rates we’ve been used to in recent years. (I can’t predict the future, just offering some thoughts).

So when will the next recession happen and how severe will it be?

Of course we don’t know exactly when or what will happen. But, here are a few pieces of info to help build some clarity. For one, the Treasury yield curve has been inverted since March of this year. This is usually a great predictor of recessions. The median time from the inversion to the start of a recession is 18 months. This lead ranges from 7 to 33 months, historically.

Here’s another representation of corporate and residential real estate leading up to a recession. Because of the smaller levels of investment relative to recent pre recession periods, one could say that the next recession may not be as severe as others. Just a data point worth sharing.

What are you seeing out there? What other insights can you provide about the next recession?

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