Will Recession Spark a Housing Market Crash? What to Know

Amid growing chances of the U.S. plunging into a recession this year, housing experts have reassured American homeowners that the value of their properties will not crash even in the face of a major economic downturn.

Two consecutive quarters of negative real gross domestic product are often considered a recession, which is characterized by a widespread decline in economic activity.

While a recession could cool the U.S. housing market, which is in the midst of an affordability crunch, a new report by the real estate brokerage Redfin said it would not lead to a crash, as most homeowners sitting on low mortgages and high-value properties are unlikely to be forced to sell.

Why It Matters

Speaking with Fox News on Sunday, President Donald Trump did not rule out the possibility of a recession hitting the country this year. “I hate to predict things like that,” Trump said. “There is a period of transition because what we’re doing is very big. We’re bringing wealth back to America.”

Fears of the U.S. entering a recession this year have grown in recent weeks, as stock markets tumbled following the president’s decision to impose sweeping tariffs on allied countries and uncertainty increases for businesses, consumers and investors.

What To Know

“The housing market is relatively insulated from a downturn,” Redfin economist Chen Zhao said in a report published on Wednesday.

She added that most homeowners “are sitting on high levels of equity” and have likely locked down relatively low mortgage payments before rates skyrocketed following the Federal Reserve’s aggressive rate-hiking campaign to combat inflation.

“Higher-income homeowners are less likely to lose their jobs and most homeowners aren’t very leveraged, because they’ve locked in ultra-low mortgage rates,” Zhao continued.

While mortgage delinquency may rise, according to the Redfin economist, it will not “necessarily spike.”

Because U.S. homes have appreciated so much over the past few years, even homeowners who may find themselves underwater will be motivated to continue paying their mortgages to keep hold of their properties. This is a different situation from the one that led to the housing crash of 2008.

The most vulnerable homeowners are those who bought their homes recently with high prices and high rates, Zhao said.

“But even then, if rates drop enough, these individuals could refinance and see their monthly payment shrink considerably,” the economist wrote. Mortgage rates typically fall when the economy weakens, unless the country moves from a recession to a so-called stagflation—with the U.S. facing both weak economic growth and high inflation.

“Mortgage servicers are also much more ready these days to offer mortgage forbearance and modification, rather than pursue foreclosure in the case of delinquency,” Zhao added. “This all adds up to few forced sales and home prices are unlikely to fall.”

While a recession is unlikely to cause home prices to drop, and homeowners are expected to be relatively safe, renters stand to bear the brunt of an economic downturn “because most recessions hit lower-income individuals harder,” and they are more likely to lose their jobs, Zhao wrote. A recession could also lead to a drop in demand that could consequently drive rents lower.

At the moment, rents in the U.S. are on the rise after months of staying flat.

What People Are Saying

Danielle Hale, the chief economist at Realtor.com, previously told Newsweek: “If the U.S. economy were to tip into a recession now, home sales are barely above long-term lows and may not have much further to fall. But economic stress among homeowners could prompt faster inventory growth that could lead to softening prices, a phenomenon we have not seen in a long time.”

Susan Wachter, a professor of real estate at the Wharton School of the University of Pennsylvania, previously told Newsweek: “A recession is likely to dampen housing demand initially due to insecurity about job prospects. However, mortgage rates are likely to decline further and this can prompt buying. Historically, housing markets have led the way out of recessions, as interest rates typically fall in response to expansionary monetary policy and house prices fall as a result of a decline in aggregate demand.”

What Happens Next

The telltale signs of an incoming recession have begun to manifest in the U.S., with a “vibe shifting in the form of financial market signals,” according to Zhao, including “falling consumer/business confidence, and rising unemployment insurance (UI) claims.”

“We’re seeing most of these indicators right now,” she said. “The only exception is UI claims, but that’s mostly because laid-off government workers won’t apply for UI until their severance ends.”

A recession is not necessarily in the cards, with researchers at JPMorgan Chase projecting a 40 percent chance of the country entering one.

Zhao said, “So far, we see no sign of a recession in the hard economic data (e.g. personal income, unemployment rate), but by the time it’s evident there, the recession has already started.”