Fears of another recession striking have been mounting as the Federal Reserve has attempted to slow the U.S. economy down by raising interest rates.
While the Fed’s rate increases brought the real estate market to a near halt and contributed to the scores of layoffs at some high-profile companies, it’s looking more likely that the Fed might just pull off a “soft landing” for the economy after all.
That would be a good thing for the housing market, right? That depends.
If Americans have good jobs they aren’t afraid of losing, they’re more likely to buy and sell homes. That’s a plus for the housing market, which stalled last year under the weight of high mortgage rates and home prices in addition to a dearth of homes for sale.
“People with jobs and income buy houses,” says Realtor.com® Chief Economist Danielle Hale. “If we see layoffs, it could mean lower home sales.”
However, skirting a recession could result in mortgage rates staying higher than they would during an economic downturn. Those elevated rates could continue to be a challenge for buyers grappling with the high costs of purchasing a home.
Higher rates could also persuade more would-be sellers to hold on to their properties—and the low rates they locked in during the COVID-19 pandemic. That might be more attractive financially than listing their homes and buying new residences at higher rates.
The problem is this would worsen the existing housing shortage.
How layoffs by large companies could affect housing
(David Paul Morris/Bloomberg via Getty Images)
“There’s still a good chance that we skip an outright recession this year,” says Jacob Channel, senior economist at the online marketplace LendingTree. “The economy may, and likely will, slow down in some respects. But I don’t think growth is going to come grinding to a complete halt.”
Yet even if the economy remains strong this year, it might still have to navigate through some turbulence.
Since the start of the year, a string of companies with household names have announced layoffs, such as Amazon, Cisco, and Zoom. Some have reduced their workforces significantly.
That’s left many workers on edge, even those who don’t work for these employers. Those folks aren’t likely to want to make what could be the largest purchase of their lives when they’re worried about their livelihoods. Fewer buyers could mean those still in the market wouldn’t have to contend with as many heated bidding wars and offers over the asking price.
However, unemployment has remained steady at just 3.7% in January, according to the most recent government data.
“The fact that these high-profile companies are laying off high-profile people gets media attention, but we’re a big economy,” says Lawrence J. White, an economics professor at New York University’s Stern School of Business. “Overall, things are looking pretty good. Unemployment is still quite low.”
More homeowners are at risk of foreclosure
(Joe Raedle/Getty Images)
There has also been a steep uptick in the number of homeowners in danger of losing their homes to foreclosure. Unlike during the Great Recession, it isn’t due to mass unemployment. And while most real estate experts don’t foresee another foreclosure crisis, it is something to watch.
More than 357,000 homeowners received a foreclosure filing last year, according to real estate data firm ATTOM. That represented a 10% increase from 2022 and a 136% jump from 2021.
However, it represented only about 0.26% of all housing units. During the Great Recession, that percentage peaked at 2.23% in 2010.
Some of that surge is to be expected after the pandemic-era’s foreclosure moratoriums expired in 2021 and lenders resumed foreclosure proceedings.
“When you’ve got a really low base or starting number, it’s not surprising to see large percentage increases of the kind that we’ve seen in foreclosure filings recently,” says Hale. “But although the eye-popping growth numbers might harken back to the mid-2000s, the housing market is in a very different place now.”
Unlike the housing bust of the mid-2000s, today’s mortgage market is much stronger. Only the most qualified borrowers are granted loans. Plus, the subprime loans, which got many homeowners in trouble in the 2000s as their payments ballooned over time, have largely been eliminated. Those steps are expected to prevent another foreclosure crisis.
There are also far more people who want homes than there are homes available for them—the opposite of what happened about 15 years ago. When foreclosures flooded the market in the late 2000s and early 2010s, all of those cheap homes dragged prices down. Today, the lack of housing supply has kept home values high, with few homeowners owing the bank more than their homes are worth.
Those who do run into some financial troubles can often sell their properties and even pocket a profit rather than go through the foreclosure process.
“Homeowners have record levels of equity in their home,” says Lisa Sturtevant, chief economist of the Bright MLS, which covers the mid-Atlantic region.
In addition to foreclosure filings, credit card debt and late payments have been rising along with auto loan delinquencies. The amount of outstanding credit card debt hit a record $1.13 trillion in the last quarter of 2023, according to a recent report from the Federal Reserve Bank of New York.
Auto payments that are 60-plus days past due have been steadily rising to record levels, says Jonathan Smoke, chief economist of Cox Automotive. However, there the loan default rate and number of vehicle repossessions were lower last year than in 2019.
That’s because while many folks are still working, they’re struggling with high housing costs, inflation, and the resumption of student loan payments. Smoke expects tax refunds to help many of these borrowers catch up on their payments.
“While this is clearly a source of stress and problem in the economy, it is contained,” says Smoke. (Smoke was previously the chief economist of Realtor.com.)
A ‘soft landing’ isn’t guaranteed
With all of the challenges in the economy, a soft landing is far from guaranteed.
“I may be the last man standing here, but I still think there are economic risks and that a mild recession is not off the table for the second half of this year,” says Ali Wolf, chief economist of the building consultancy Zonda. “As you look at history as the economy adjusts to higher interest rates, it often looks like a soft landing … on the way to a hard landing.”
Hale, of Realtor.com, puts the odds of a recession at about 50-50. She’s worried that commercial real estate owners of offices, apartments, and other buildings could default on their loans, spurring another downturn.
The problem is that many of these loans are shorter than a 30-year mortgage, often only three to 15 years, and require a balloon payment when they come due.
Owners often try to refinance those loans before they need to make those large payments, but they have been stymied by higher interest rates and lower property valuations. The higher rates will greatly increase their monthly payments when they do refinance. And unlike in the past, they can’t just raise rents on office tenants to cover their obligations when they’re grappling with vacancies as more people work remotely. That makes them more vulnerable to a default.
If the country does succumb to a downturn, Hale doesn’t think it will be nearly as bad as some of the more memorably painful ones. She expects unemployment could go as high as about 6%. That’s much lower than the Great Recession when it peaked at around 10%, or in early 2020 when COVID-19 set in, when unemployment hit nearly 15%, according to U.S. Bureau of Labor Statistics data.
“I don’t think it will be anything like the pandemic era,” says Hale.
The upsides to a recession
While most Americans aren’t rooting for a recession, there would be some silver linings.
Typically, when the U.S. economy is struggling, the Fed will cut interest rates to stimulate the economy and incentivize companies to expand and hire again. Mortgage rates, which are separate from the Fed’s rates, usually follow in a similar trajectory. So if the Fed cuts rates again like it did during the pandemic, mortgage rates would be expected to fall.
Lower rates could make purchasing a home more affordable for buyers who have been priced out of the market. It could also light a fire under homeowners who might be tempted to list their homes and purchase new ones. That could help to increase the nation’s very limited housing supply.
Home prices could also come down if fewer buyers can afford to purchase properties. That would be a boon to those with more secure jobs who have been waiting for the right opportunity to get into the market.
But they would have to live through another recession.
“I continue to think that even though everything won’t be sunshine and rainbows this year, and that some people will unfortunately struggle, 2024 probably won’t be the year that the economy comes crashing down,” says LendingTree’s Channel. “Mortgage rates will fall and the housing market will be a bit friendlier than 2023’s [market] was, though it’s still going to be a hard nut for many people to crack.”