What Would a Recession Mean for Real Estate in 2023?
Many fear a recession in 2023—but is one inevitable? Let’s break it down.
What is a recession?
The most accepted meaning of “recession” is the one from the National Bureau of Economic Research (NBER). The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” That means that the decline has to substantially affect multiple economic sectors for an extended period of time to be considered an actual recession.
This definition is helpful if you always have your eye on the economy, but the average person will recognize a recession more by its overall impact and effects on their financial community. In a significant recession, the public experiences job loss and lower job security. Additionally, a recession also causes less bargaining power in the workplace. People searching for a first job, or switching careers during a recession, will find their options reduced and their starting salaries lower than they would be otherwise. This will impact your wealth accumulation as you catch up to the salary you could’ve have commanded in a stronger economy. Additionally, your retirement and other investment accounts can take a hit during a recession due to fluctuating markets.
It’s also more likely that you’ll have a difficult time borrowing money. Like everyone else, financial institutions tighten up during an economic slowdown. The financial institutions implement stricter rules, require lower credit limits, and offer fewer types of credit available.
Are we in a recession?
Currently, we are not. Despite widespread fears, the U.S. economy is not in a recession—and the Federal Reserve is aiming to side-step a full-blown recession and head into what’s known as a “soft landing.”
Soft landings are a normal part of the economic cycle. If you can imagine the economy as a series of peaks and valleys and a soft landing is a valley—but it’s a shallow valley when compared to a major economic downturn. Central banks aim for a soft landing when they take action on inflation by increasing interest rates, like the moves we’re currently seeing from the Fed. The idea of a soft landing is to slow an overheated and rapidly inflating economy without a severe recession.
If you would like to know where the economy is headed in 2023, here are the opinions from top economic experts:
Rob Haworth, a senior investment strategy director at U.S. Bank Wealth Management says, “the economy, at this point, could tip in either direction with regard to whether we see a recession in 2023. There’s good news in the most recent reports in that consumer spending is holding up and inflation is coming down. But sales of durable goods are slowing and there may be other challenges ahead.”
Matt Schoeppner, senior economist at U.S. Bank added, “It seems likely the economy may stay out of a recession, but we expect that real GDP growth will be relatively flat in the near term. It might qualify as what we call a ‘growth recession,’ where we see a slow economy, but with few ramifications for the job market.”
Officials at the U.S. Bank forecast the U.S. economy narrowly avoiding a recession this year.
Bankrate’s poll of economists show a 64% likelihood of the U.S. entering a recession in 2023. The Bankrate financial company also acknowledges that forecasting is complex and prone to error, but it’s rare to have such a strong consensus on any economic topic. The company also recognizes that history has a significant impact on the forecasts, and many economists who believe a recession is inevitable are citing past patterns between Federal Reserve actions and recessions that follow.
World Economic Forum
In January 2023, the World Economic Forum released results in which two-thirds of surveyed economists predicted a recession in 2023. Their Chief Economist's Outlook in January stated, “Global growth prospects remain anaemic and global recession risk is high.”
Moody’s is predicting a “slowcession” in 2023—a word they coined to mean a period in which economic growth slows or stops, but the economy avoids a severe contraction overall.
Most recently, Mark Zandi from Moody’s took to Twitter to discuss why he also believes the U.S. will avoid a recession in 2023. While history would indicate that the Fed raising rates will bring an inevitable recession, Zandi argues that the American economy is now uniquely situated to handle it, with larger reserves of personal savings, an unwillingness to lay off workers only to have to find and retrain new ones, and a highly capitalized banking system. Zandi also suggests that the current pessimism around a potential recession could help us avoid one, because a slight decline in consumer spending will bring down inflation naturally.
So, is a recession coming?
It’s possible, but it is certainly not inevitable. Some economists predict a recession by the end of 2023, and there are many variable factors that affect the economy outside of our control. The biggest factors right now include COVID-19 and supply chain disruptions, climate change, and the war in Ukraine. Even financial experts have uncertainties, and as Alix Martichoux recently wrote for The Hill, “the economy right now is weird.” Most economists are forecasting a continued economic slowdown—but if it’s a recession, it’s likely to be a “recession with a small r.”
What is an economic slowdown compared to a recession? A slowdown or "slowcession" is a short-term, mild period of economic contraction. It can be uncomfortable, but it doesn’t have the far-reaching and devastating effects of a major Recession like the one in the early 1980s or the late 2000s.
Most experts agree and believe that the strength of the labor market will be a major factor in preventing a severe economic downturn. Although there have been high-profile layoffs in the tech industry and consumer spending has started to slow —the unemployment rate is very low, job growth has been strong, and there are still more available jobs than there are available workers. In fact, the U.S. job market continues to be the strongest it’s been in over 50 years.
This is important to consider because, “Rising unemployment is one of a number of indicators that define a recession. Unemployment also makes the downturn worse” (McGrath, 2022). That’s why U.S. Bank’s Rob Haworth says that ultimately, it’s the job market that will dictate the economy’s direction. “If the job market weakens, it may mean the economy is about to face more headwinds” (Haworth, 9 March 2023).
What would a recession mean for real estate in 2023?
A recession is never good news—but for the current real estate market, it wouldn’t be all that bad.
First, interest rates will fall as the economy slows. The Fed hiked up rates to reduce consumer spending and inflation, but if that results in a recession, rates will go down again. For buyers, that means mortgages will become more affordable with lower interest rates—and since current forecasts don’t predict a huge downturn in the job market, you’re less likely to experience job loss that will affect your ability to buy.
If you’re selling, affordable mortgages are great for you too. Lower interest rates create more buyer activity. Buyers who have been sitting out of the market waiting for rates to go down will jump back in the market. This means it will become easier for real estate agents to find the right fit.
Second, buyers are more likely to find decreased home prices. Competition is lower during a recession or slowdown, and this results in home prices dropping. Additionally, a higher number of sellers will reduce their prices to sell quickly.
However, if you’re selling or buying during a recession or slowdown and your personal economic situation is good, you can take your time. If you are wondering how you should approach the purchase of a beautiful new home, or plan the sale of your current home while the economy is changing? Tell us what you’re trying to achieve, and we would love to help you get there.
Recession forecasts making you nervous? Get in touch. Our team is experienced in navigating market ups and downs and we’re prepared to help you reach your real estate goals—no matter what the economy is doing. Click the button below to get started.