Key Points:

• In May and June, four of the eight indicators in our model flashed housing recession. 
  
  
• While July data is still trickling in, it’s looking like we may narrowly avoid a housing recession.
  
  
• The relationship between housing and economic recessions is complicated and, contrary to what many believe, housing does not always lead economic downturns.

It’s a common belief that the housing market is always the first to dive into an economic recession and the first to climb out. And sure enough, our analysis shows of the 10 distinct housing recessions we tracked since 1970, six of them precede an economic recession as determined by the National Bureau of Economic Research Business (NBER). But let’s not mistake correlation for causation. 

The housing market is notoriously interest rate sensitive. When the economy overheats or inflation flares up, the Federal Reserve (Fed) often raises the federal funds rates, which can slow the housing market and the broader economy too. Once the Fed starts cutting rates, the housing market typically perks up again. The real triggers for economic recessions are broader economic conditions and how the Fed responds to them – a housing recession does not necessarily kick things off. And, if you’re worried about our current economic cycle, we have some good news. While the housing market flirted with a recession in May and June, it didn’t fully commit, and July is already showing signs of a comeback. 

“While the housing market flirted with a recession in May and June, it didn’t fully commit, and July is already showing signs of a comeback.”

What Defines a Housing Recession?

While some rules of thumb exist, there has never been general agreement on the definition of a housing recession, so we created one. To determine if the housing market is in a recession, we developed a comprehensive, rule-based model based on the NBER Business Cycle Dating Committee’s method of calling recessions, which relies on eight economic indicators. Our housing recession equivalent of the NBER methodology is based on the following indicators: average hourly earnings of non-supervisory construction workers; the total number of employees in residential building construction; the total number of employees in real estate rental and leasing; the number of single-family housing starts; private residential fixed investment; personal consumption expenditures on housing and utilities; existing-home sales; and our Real House Price Index, which is a measure of affordability. 

If the moving average of the monthly growth rate of four of the eight indicators¹ is negative for at least three consecutive months, then a housing recession has begun. According to this measure, in May and June, four of the eight indicators in our model flashed housing recession. While July data is still trickling in, it’s looking like we may narrowly avoid a housing recession. 

A History of Economic and Housing Recessions

Examining the history of economic and housing recessions reveals a varied pattern -- sometimes housing takes the lead, but that correlation doesn’t mean causation. For example, in 1979 and again in 1981, the housing market was considered in recession. From December of 1979 to January of 1980, interest rates were soaring as the Fed combatted the “Great Inflation.” As a result of tighter monetary policy and higher inflation, mortgage rates increased to a peak of about 18 percent in 1981. As mortgage rates soared to levels unseen before or since, homes were becoming significantly less affordable and home sales and new construction was falling. The economic recession that followed both housing recessions was also a result of the Fed’s aggressive interest rate hikes aimed at combating high inflation.

Yet, in some cases, a housing recession has occurred independently of an economic recession, and economic recessions have also happened without a prior housing downturn. In 1994-1995, housing affordability, sales, and construction fell as the Fed increased its target rate to 5.5 percent from 3 percent in one calendar year to prevent an overheating economy. However, an economic recession did not follow.

Another example of an isolated housing recession is the last official housing recession in 2022, which began in May and ended in November. As a result of the rapid decline in affordability, builders pulled back on breaking ground on more homes. Additionally, higher mortgage rates had a dual impact on existing-home sales – pricing out buyers who lost purchasing power and keeping some potential sellers’ rate-locked in, resulting in fewer transactions. Yet again, an economic recession did not occur. 

Conversely, in 2020 there was a global economic recession caused by COVID-19 lockdowns, but the housing market did not fall into a recession, instead lower mortgage rates and the shift to remote work induced by the pandemic sent the housing market soaring. 

Click on the chart for an interactive view.

Housing Recession or Not? That is the Question

The relationship between housing and economic recessions is complicated. But whether housing leads the economy or not, there is good news on the horizon. Mortgage rates fell in July and August, which improved affordability and eased the rate lock-in effect. While this rate drop has not yet spurred a significant rebound in housing activity, it provides a glimmer of optimism that the peak risk of a housing recession may be behind us.

 ¹Due to data limitations, prior to 1990, only three indicators must be negative to indicate recession, whereas after 1990 it must be four.