A Recession Could Throw Cold Water On The Housing Market — But That Doesn't Mean It's Going To Get Any Easier To Buy A Home

The US economy is in a strange place–and that means the housing market is too. 

As rising interest rates do their job to tamp down demand, fears of a coming recession are on the rise. Prospective buyers may be wondering what it all means for their dreams of owning a home.

In short, price growth will likely slow down as demand falls, and mortgage rates have begun to edge lower after soaring earlier this year. But with a persistent lack of available homes for sale, an economic slowdown won't bring a new era of affordability to the US housing market.

A recession could hit in 2023 — but it will likely be mild

Though there are plenty of jobs to go around, wages are rising, and spending is booming, some Americans are having a tough time. Inflation has climbed to a forty-year high while consumer sentiment has fallen to a decade low. Rising interest rates have also made all forms of borrowing from car loans to mortgage payments more expensive than they were just a few months ago.

As the economy falls further out of whack, fear of a possible recession is spreading. And while experts believe it's unlikely to happen in 2022, signs do point to an economic downturn in 2023.

"Financial conditions have tightened significantly, and the economy is slowing faster than previously expected as markets adjust to the Federal Reserve's tightening guidance," Doug Duncan, senior vice president and chief economist at Fannie Mae, said in a statement referring to the Fed's interest rate hikes that began in March in an attempt to cool sky-high demand throughout the economy.

Home prices will likely continue to grow in most markets, but at a slower pace

If a recession is on the horizon for 2023, it could mean the housing market is bracing for a cool down after years of hot demand driving prices higher — but that doesn't mean homeownership will become more affordable for prospective buyers. 

"If the economy were to weaken or a recession were to hit, that would further weaken demand," Len Kiefer, the chief economist at Freddie Mac, told Insider, adding that it could lead to a deceleration in price growth. 

Although home prices have actually declined in some markets, they're still rising in other parts of the country —  but at a much slower rate. While price growth is expected to slow further, Kiefer says that doesn't mean prices will go down. 

"We expect house price growth to moderate over the summer," Kiefer said. "However, we still expect house price growth to remain positive. That means that coupled with higher mortgage rates homebuyer affordability will be stretched even further." 

The rock-bottom mortgage rates of the pandemic era are gone

Pandemic-era mortgage deals are over and it's making homeownership more costly. 

Although mortgage rates fell slightly in May, they are much higher than they were in 2021. 

According to Freddie Mac, the average U.S. fixed rate for a 30-year mortgage fell to 5.10% last week, from a pandemic high of 5.30% — but that's significantly up from a pandemic low of 2.68% in December 2020.

As mortgage rates put additional pressure on housing costs, buyers of a median-priced home are looking at monthly mortgage payments that are more than $400 higher than a year ago. 

There still aren't enough houses on the market to meet demand

With rates generally on the rise and inflation putting pressure on everyday costs, Americans are likely to have a harder time affording housing — let alone a new home purchase in 2023. 

"Not only is the worsening affordability of homes a problem for potential entry-level homebuyers, but current homeowners are less likely to trade in their existing lower-rate mortgages and list their homes for sale, both of which will likely weigh on sales," Duncan said.

To boost housing market equilibrium, home prices will need to fall — and that means more homes will need to be built in 2023. "Cooling of the market is necessary to bring supply and demand back into balance," Kefer said. "The rate of house price growth over the past two years is not sustainable over the long run."

Even with more new listings hitting the market, the number of homes for sale are still at historic lows.

To address home price growth and the nation's lack of housing affordability, the Biden Administration has launched an initiative that proposes using federal dollars to boost the affordable housing supply. But there's a catch — the plan will take course over the next five years. 

That means Americans are unlikely to see a surplus of new inventory introduced to the real estate market next year. With a possible recession looming and mortgage rates trending near a thirteen-year high, the nation's lack of housing inventory will continue to dampen affordability for buyers in 2023.

SOURCE: BusinessInsider.com