One worry about the upcoming recession (unless one already is here) is that it will be deepened by a sharp drop in home prices. Homes tend to be the most valuable assets Americans own. A run-up in real estate prices makes many Americans “richer.” One characteristic of the Great Recession is that millions of homes became worth less than the mortgages they carried.
Home prices have risen 20% year over year each month of 2022, according to the carefully followed S&P Case Shiller home price index. Some markets, such as Tampa and Phoenix, have posted increases of closer to 30%. The brisk demand that has lifted home prices has been driven to a great extent by low mortgage rates, which dropped to 3% for a 30-year fixed mortgage last year. Today, rates have soared to close to 5%, which has pushed some potential buyers out of the market.
The real estate market in 2022 looks much different from the one in 2007 through 2009. Many of the mortgages that ran into trouble over that three-year period were variable rate mortgages given to people who could not afford mortgage payments when these loans reset at higher rates. The result was millions of mortgage defaults, which, in turn, pulled down the entire market. In such places as Las Vegas and parts of Florida, home prices dropped as much as 50%.
The current decline in home prices could spur demand among people who remain employed in a downturn. Unemployment currently sits at 3.5%, which is close to the lowest level since World War II. Even if a recession causes layoffs, the number of people out of jobs this year and next likely will not fall below 6%, which is nowhere near the 10% during the Great Recession.
Home inventory in America continues to be quite low. According to Realtor.com “The housing shortage is just too severe as there are far more people looking for homes to buy and rent than there are homes available.” As home prices dip, it may actually push buying activity to higher levels. People who have looked for homes they can afford may find that homes have become more affordable.
The housing market may dig America out of recession, rather than deepening it.
Sponsored: Tips for Investing
A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.