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Could a recession actually boost real estate sales?

Consider this hypothetical question: if a recession hits this year or next, could that actually be good for real estate sales? Typically, the Fed’s reaction to an economic slow-down or recession is to reduce interest rates to boost the economy. When interest rates are reduced, that usually reduces mortgage interest rates. Housing is critically linked to mortgage rates, so if rates were reduced, wouldn’t that drive real estate sales higher?

The argument against the above line of reasoning will be, if there is a recession, there would be layoffs, and people would be out of work not able to finance real estate purchases. That’s a good argument, in general, but consider the state of demand for housing. Sales dropped unexpected in December by 6.4%, but last month they rose again, just as unexpectedly. Could this all just be a reflection of interest rates, which seem to have peaked around October/November, and have been falling since then? In addition, the Federal Reserve has been remarkably “dovish” on rates since December, and have stated multiple times that they are going to be patient with respect to future rate changes.

Next, consider the state of supply for housing. Builders have been slow to return to the booming days of the early 2000s. In fact, new home construction, at ~1.2 million units, is below the long-term average of 1.5 million units per year. Demand, and pent-up demand, is high but unsatisfied, because commensurate supply is unavailable. In addition, prices are high, and interest rates have risen over the past year to almost 5%. If interest rates come back down to the 4% range, it will “unstick” the housing trap, where people are currently afraid to move because they don’t want to give up on their current 4% (or lower) loan. In essence, many people are currently locked in at a low interest rate and can’t move until rates come down again.

economy, housing, interest rates

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