Even A Recession Will Only Help Home Prices So Much

As much of a pain that a recession always is, usually more to some than others with income inequality a big factor, there have been people speculating that just maybe it would help cool down the cost of housing.

It’s a fair question, but unlike in 2009 and on, where the Great Recession that sat in part atop insane property valuations, conditions are different. Even with property values likely to fall some, it won’t set things back to whatever passed for normal before the pandemic. The millions who haven’t been able to approach a house purchase because of outrageous prices might at best find them “only” incredibly steep, and with higher mortgage rates, maybe as unreachable as they have been.

House prices rise over time. Not always in a straight line and sometimes with reversals, but they do tend to go up. In the last few years, you could have said that instead they hitched a ride on a rocket booster. Below is a graph from the Federal Reserve Bank of St. Louis showing median house prices from the Census Bureau and U.S. Department of Housing and Urban Development.

The period from the start of the pandemic in 2020 to the present is unprecedented. At the end of the first quarter of 2020, the median house price was $322,600. The median price at the same point of time in 2022 was $449,300, an increase of 39.3% in two years. Unheard of.

When house prices drop, it’s usually not by a huge amount. The counter example of 2006, the height of the “trade-up-your-house” hype that resulted in a housing market meltdown, was median prices going from $257,400 at the end of 2006 to $208,400 at the end of 2008. That enormous crash—fueled by millions of people who lost their houses to foreclosure, frozen credit markets so money wasn’t available to most, and lenders straight-arming the entire mortgage market—was a drop of 19%.

If the same fall happened, that would bring the median house back to 363,933. That would still be almost 13% higher than the median price at the end of 2019.

Unlike after the Great Recession, lenders have been far more careful. There aren’t massive waves of foreclosures waiting to happen. No investment banks are sitting on worthless derivative financial instruments that will bring them down.

Instead, the current conditions will put a floor under housing valuations so that even though they will lose some value, it might not be all that much.

First, the country still has a chronic shortage of homes—a gap of millions of units—as not enough have been built in the last 15 years to keep up with needs. Homebuilders could try to address that, but they can’t sell off the homes they have now fast enough, so planning on construction of many more going into next year doesn’t make sense.

That puts a big damper on supply, which will help to keep prices from utterly crashing. So will the Federal Reserve’s actions to fight inflation because they involve quantitative tightening. The Fed looks to reduce its balance sheet holdings of bonds, which it had been buying to inject more money into the economic system. Those bonds include the ones backed by mortgages and put together by the so-called enterprise lenders, Fannie Mae
FNMA
and Freddie Mac.

When these bonds hit the markets, that drives down the price for them because there’s suddenly too much supply. When prices on bonds drop, investors want effective higher interest rates for them because they don’t want to buy something that’s losing overall value. The interest rates on the mortgage-backed securities, or MBSs, are signals to real estate lenders, who boost mortgage rates.

Even though rates dropped recently, they’re still at close to 6.6%, rates not regularly seen since 2008. That adds a lot to monthly payments, making the houses, which are still expensive, even harder to afford.

It’s a punishing set of facts that is likely to keep more people as renters rather than seeing newly formed families buying homes and beginning to build some personal wealth.