Recession and the Housing Market

Investors need a diversified portfolio to mitigate any systematic or unsystematic risks. For that reason, they will include a variety of investments in their portfolio. While investing in the stock and bond market is common for most investors, they may also look towards the housing market. The housing market, however, does not perform similarly to the stock or bond market. The housing market does not suffer regular fluctuations compared to other markets. However, there are times when this market takes a hit. Historically, the housing market has not suffered an impact due to economic downturns. Several factors may contribute to it. Nonetheless, the housing market may experience some changes during a recession.

Table of Contents

What is a Recession?

A recession is a period when there is a significant downturn in economic activity in a country or region. Usually, recessions follow consecutive periods of economic decline. During a recession, the economic activity in a nation declines. There are several factors that may indicate a recession. These include higher unemployment, lower incomes, falling interest rates, lower industrial production, etc. Most experts suggest that when a country enters into a recession, its GDP shrinks for two consecutive quarters. However, there is evidence that suggests that might not be true. Nonetheless, a recession occurs when a region or country experiences continuing economic downturns. For example, a nation that goes through several periods of deflation may enter into a recession.

What is the relationship between a Recession and the Housing Market?

There is no conclusive evidence that suggests a direct relationship between recession and the housing market. The actual connection between these two may depend on several factors. Recession may not actually be bad for the housing market. During a recession, the market interest rates fall. It means that investors can obtain loans at a lower interest rate and invest it in the housing market. Falling interest rates also means that investors have to pay lower mortgage payments. Therefore, they can actually afford to pay their mortgage even when they don’t have a steady income source. However, this advantage only applies to new homeowners. For those who have already invested in the housing market, it may be a different story. For existing homeowners, a recession can be significantly detrimental. They suffer due to the decreasing house prices. On top of that, they have to pay higher interest rates on their mortgages because they obtained the loan before the recession. As mentioned, however, that may not be the case for every recession. Sometimes, existing homeowners may also benefit from an appreciation of home values.

Should investors invest in the Housing Market during a Recession?

Historical data suggests that a recession is the best period for investing in the housing market. As mentioned above, it is because the interest rates are lower during this period. For investors, the housing market is a stable investment market during a recession. However, obtaining such facilities may not be possible for everyone. Another issue for investors to consider is whether they can dispose of their assets during a recession. Therefore, they will need to account for the illiquidity that comes with such investments. Overall, a recession has minimal or no impact on the housing market. Therefore, it presents a valuable investment for most. As mentioned, however, some factors may suggest otherwise.

Conclusion

A recession is a period of consecutive downfalls in a country or region’s economic activity. The housing market is often a stable investment for most investors during this period. However, it may also impact existing homeowners adversely. Nonetheless, several factors dictate whether a recession will impact the housing market.