How Recessions Affect Housing Prices in the US

It's not always bad news

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Recessions can be scary, and rightfully so. When the economy is in a big, sustained downturn, more often than not it has a negative impact on your wallet, especially if you're earning less than the median income. Often, that's most apparent in your largest expense: your housing.

However, it's not always clear what to expect. For example, recessions often result in lower home prices, which is great for homebuyers—until you factor in job uncertainty and tightening lender restrictions. Knowing what could happen during the next recession can help you prepare to weather the storm.

Key Takeaways

  • A recession is defined as a sustained decrease (more than a few months) in economy-wide indicators of performance, such as income and employment levels.
  • Recessions usually mean the housing market will take a downturn, but sometimes a down housing market can be a precursor to a recession.
  • The market can become more favorable for homebuyers during a recession but it can be harder to qualify for a mortgage.
  • More people are generally pushed into renting during a recession, which usually raises rent prices, or at least keeps them from decreasing.

Recessions Impact All Industries

There isn't one standardized definition of a recession. Rather, it's more of a phenomenon that—by the time we're in the midst of one—most experts can agree that we're in a period of a sustained decline in economic activity. The National Bureau of Economic Research defines recessions as a period of widespread economic decline that lasts for more than a few months.

The exact measurements of "economic decline" vary, but researchers often use metrics such as the nationwide unemployment rate and income. These factors radiate and affect the rest of the entire economy, such as the hospitality industry, government contracts, health care, and even real estate.

Why House Prices Usually Fall During Recessions

House prices don't always fall during a recession, but they do drop more often than not. According to the Joint Center for Housing Studies at Harvard University, housing prices dropped in four out of five recessions that have occured since 1980.

Across all of those recessions, the average house price dip was 5% for each year the economy remained down. In some cases, that drop was huge: In the Great Recession, the average home price dropped by nearly 13%.

Tightening Lender Restrictions

It's more common for people to lose their jobs in a recession, and that can put pressure on your ability to repay a mortgage. That's why during a recession, most lenders will tighten their requirements to get a mortgage.


Lenders try to decrease their risk by only giving out loans to the best-qualified applicants. You may need to have a higher credit score in order to qualify, a higher down payment, or a more stable job situation.

Less Competition Among Homebuyers

When times are tough, most people tend to shy away from making big financial commitments like a 30-year mortgage costing hundreds or thousands of dollars a month. The flow of homebuyers doesn't shut off completely (not everyone is affected in a recession), but it does slow down to more of a trickle.

From 2005 to 2008, for example, sales of single-family homes dropped by 30%. According to the law of supply and demand, when there's less demand for a product, prices will drop.

Rent Costs Often Remain High During Recessions

In most recessions, rental costs do the opposite of home purchase costs: They tend to stay high or rise, rather than decline. Because people's incomes tend to shrink during a recession, your current rental costs could take a bigger bite out of your paycheck. Here's why.

Fewer People Interested in Buying

Fewer people buy homes during a recession. However, people still have to live somewhere, and unless you're moving in with someone for free or moving out on the street, your only other option is to rent. In other words, more would-be homeowners remain renters.

More Families Being Pushed Into Foreclosure

At the outset of the Great Recession, one out of every five workers lost their job. Even after people found new employment, they earned 18% less, on average. It's financial hardships like that which pushed more than six million Americans into foreclosure during the last recession. With a recent foreclosure on your credit, it's difficult or impossible to buy a new home, so more people are forced into renting.

Fewer Homes Being Built

With fewer would-be homeowners entering the market, housing developers start to taper off the number of new homes being built. During the Great Recession, for example, new housing starts dropped by 36%. For people who prefer new homes especially, there may be fewer options from which to choose.

How Recessions Affect Homebuyers and Sellers

Buying a home in a recession can be a great thing for you if your personal finance conditions allow it. You can make yourself a standout homebuyer by working to grow your credit, finding a very stable job, and saving a big down payment. You may have more options to pick from (although fewer of them may be new homes), house prices may be lower, interest rates may be cheaper, and you'll have more bargaining power. For those reasons, recessions can often turn into a buyer's market.

On the other hand, if you're selling a home, you may need to adjust your expectations in terms of how long it takes to sell your home and what concessions you'll need to make to get a buyer. By not overpricing your home and making it as attractive and move-in ready as possible, you can boost your odds of successfully selling your home.

Frequently Asked Questions (FAQs)

What is a housing price index?

A housing price index measures how much the price of homes changes over time. There are many different ways you can calculate this, and that's why there are so many different house price indices. The FHFA house price index, for example, doesn't include very expensive homes, so it's more stable over time, whereas the Case-Shiller index includes the wild swings that high-priced homes can go through.

How can a housing bubble cause a recession?

If lenders stop doing their due diligence in making sure people can afford home loans, then house prices can rapidly rise because more people will be competing to buy homes. If those homebuyers aren't able to keep up with payments, then a massive amount of people could default on those loans, causing a ripple effect throughout the entire economy.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. National Bureau of Economic Research. “Business Cycle Dating.”

  2. Joint Center for Housing Studies at Harvard University. “Past Recessions Might Offer Lessons on the Impact of COVID-19 on Housing Markets.”

  3. Chase. “The Effects of Recessions on Mortgages.”

  4. Junior Achievement. “The Rise and Fall of the US Housing Market.”

  5. U.S. Government Accountability Office. “What Can the Great Recession Teach Us About Rent Affordability in the Age of Coronavirus?

  6. Wharton School of the University of Pennsylvania. “How the Great Recession Changed American Workers.”

  7. National Bureau of Economic Research. “Job Loss in the Great Recession.”

  8. NYU Law. “Starting Over: Michael Ohlrogge Tracks Post-Foreclosure Outcomes During The Great Recession.”

  9. “Should You Sell Your Home During a Recession? 5 Crucial Things To Consider.”

  10. Federal Reserve Bank of St. Louis. “A Closer Look at House Price Indexes.”

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