What a Recession Could Mean for the Housing Market

By Keith Griffith, realtor.com 

President Donald Trump's new tariffs have sparked fears of a trade war, potentially pushing the U.S. into recession. This could significantly impact the housing market. Since the tariff announcement, the S&P 500 has fallen over 12% across four trading sessions, erasing more than $10 trillion in stock market value. Analysts at J.P. Morgan and Moody's Analytics have increased their recession forecasts to 60%, up from 40% previously.

A recession is a prolonged slowdown in economic activity, characterized by reduced hiring, increased layoffs, and higher unemployment. While a stock market crash can trigger a recession, they are not the same. Despite rising recession fears, the outcome is uncertain. Economic uncertainty can impact the housing market, causing homebuyers to hesitate due to the significant financial commitment involved.

What a recession would mean for home prices and sales

A recession typically leads to higher unemployment, reduced buyer demand, and falling home sales, which can lower home prices as inventory builds up. The housing market is already weak, with low sales levels. A recession could worsen regional disparities in housing supply. However, many homeowners have low mortgage rates, making them less likely to be forced into selling due to financial strain.

In a recession, homebuilders might reduce new construction, worsening the housing supply gap. The impact on the housing market could be significant but not catastrophic, mainly extending existing trends like fewer buyers, rising inventory, and softer prices. Homeowners are well-positioned to absorb price corrections due to previous equity gains. Even a 20% price drop would leave homeowner equity at levels similar to those in 2019.

What a recession would mean for mortgage rates

Mortgage rates generally decline during recessions as investors shift to safer assets like Treasury bonds, driving up bond prices and lowering yields. Since mortgage rates closely follow the 10-year Treasury yield, this dynamic often results in lower mortgage rates. Recently, long-term yields dropped below 4% amid stock market volatility, briefly pushing mortgage rates to their lowest levels this year before rebounding as bond yields rose again

During a recession, the Federal Reserve typically eases monetary policy, lowering borrowing costs. While this primarily affects short-term rates, it also influences long-term rates like mortgages. Lower mortgage rates can benefit homeowners refinancing, but job insecurity may deter potential buyers despite cheaper borrowing.

How homebuyers can prepare for a recession

According to Jones, the best way homebuyers can prepare for a recession is to make sure they have plenty of financial leeway on their mortgage payments.

“Take stock of your financial situation. Don't take on a housing payment that will be a stretch to afford even in the best of times,” she says.

If buying a home is only marginally affordable, Jones says to consider renting, which is cheaper than buying in much of the country and allows you to keep your down payment savings relatively liquid, just in case the job market loses its footing.