How would a housing crash affect home prices?

Homebuilder sentiment comes from the result of a survey conducted by the NAHB and Wells Fargo Housing Market Index every month. The survey asks over 140,000 members about the state of the housing industry. The most recent score of 49 represents the first time since May 2020 that the index dropped past the score of 50, the number for breaking even.

It is also estimated that the housing shortfall in the US is up to as high as four million homes, with it taking up to eight months or more to build new homes. That is compared to up to roughly six months prior to the pandemic.

Does a recession reduce the cost of housing?

Theoretically, a recession should reduce the cost of housing, but that is not always the case. The current drastically undersold real estate market means property prices are mostly unaffected by certain contractionary forces. This is the case right now even on the precipice of a major economic downturn.

Housing prices, for the most part, continued their upward trend throughout 2022, even as mortgage rates increased 4% from January to March. The average property price in the United States spiked 21% from the first quarter of 2021 to the first quarter of 2022. In fact, mortgage rates are trending closer to their highest levels since 2008. Eventually, home prices will likely feel the effects of an unkind seller’s market, especially if, as predicted, mortgage rates continue to soar in response to the Federal Reserve’s barrage of interest rate hikes.

Given these economic conditions, it remains to be seen whether it slows current accelerations or ends up easing home prices.