How a Recession Could Stimulate the Housing Market

As concerns about a 2025 recession grow, many are watching closely to see how a downturn could affect the housing market. While homeowners may be in a stable position due to built-up home equity and fixed mortgage rates, renters could face tougher conditions if job losses mount and wages stagnate. However, a recession could also present unique opportunities for both homeowners and investors.

Historically, recessions have had a mixed impact on the housing market. During the 2008 financial crisis, the housing market was severely impacted by a combination of factors, including loose lending practices and an increase in subprime mortgages. This led to a collapse in the housing market, with many homeowners facing foreclosure and a significant drop in home prices. However, the current economic landscape is different, with most homeowners having low-interest mortgages and substantial equity in their homes. This reduces the likelihood of widespread foreclosures or sharp declines in home prices.

John Manning, managing broker at RE/MAX Gateway in Seattle, noted that the Seattle housing market was less impacted than many other markets during the 2008 recession. This was due to a high concentration of world-class employers in diverse sectors that kept the local economy afloat. While the recession was painful for many, especially speculators, it was never catastrophic in Seattle.

According to a report from Redfin, home prices are not expected to drop sharply in the event of a downturn. Most homeowners have locked in ultra-low mortgage rates, meaning they are unlikely to sell unless absolutely necessary. Even if mortgage delinquencies rise, lenders today are more likely to offer modifications or forbearance rather than push for foreclosure. This stability in home prices can benefit both buyers and investors, as it reduces the risk of significant price declines.

Renters, on the other hand, face greater risk during a recession. A weaker economy tends to hit renters harder than homeowners, especially if job losses rise. Recessions often affect lower-income workers more severely, which can lead to reduced rental demand and lower rent prices. However, those who lose their jobs or see their wages stagnate may struggle to cover housing costs regardless of lower rents.

Large institutional investors tend to expand their real estate holdings during economic downturns, often taking advantage of reduced competition from individual buyers. As John Manning explained, "It is a paradox in real estate that consumers are more likely to buy when prices are at their highest rather than at their lowest." The same cannot be said for large institutions and hedge funds that have annexed huge numbers of American homes since the 2007-2009 Great Recession. Sitting on large reserves of cash, institutions tend to expand their buying activities to take advantage of widespread bargains when consumers pull back.

Mortgage rates could play a key role in how a recession affects the housing market. Recessions typically lead to lower mortgage rates, as the Federal Reserve cuts interest rates to stimulate borrowing and spending. This could help recent buyers refinance into lower payments and keep the housing market stable. However, if inflation remains high, rates may not drop as expected, which could complicate the outlook for both buyers and sellers.

In summary, a recession could benefit the housing market by providing investment opportunities for large institutional investors and increasing home affordability for buyers through lower mortgage rates and stable home prices. These factors can create a more favorable environment for both investors and potential homeowners.