Do rising mortgage rates necessarily trigger an economic recession or vice versa? With six of 10 distinct housing recessions since the 1970s preceding an economic recession (as determined by the National Bureau of Economic Research Business), it is tempting to answer, “yes.”
But real estate economists say it’s not so simple.
“Let’s not mistake correlation for causation,” said researcher and Deputy Chief Economist for First American Financial Corporation Odeta Kushi, who publishes quarterly analyses of housing market data and trends.
Because the housing market is “flirting with recession,” Kushi uses her latest report to delve into the complex connection between housing and economic recessions.
“Contrary to what many believe, housing does not always lead economic downturns,” Kushi said, granting that “the housing market is notoriously interest-rate sensitive.”
In a nutshell, when the country’s economy overheats and inflation flares, the Federal Reserve (Fed) might raise the federal funds rates, which tends to slow the housing market, which can trigger a broader economic downturn, she said. And, reversely, when the Fed starts lowering rates, the housing market perks up and the general economic landscape follows course.
But causes of economic recessions involve broader economic conditions and the Fed’s response to them, she said. “A housing recession does not necessarily kick things off.”
Kushi provides evidence of a nuanced relationship between the housing market and the overall economy:
From December 1979 to January 1980, the Fed upped interest rates to combat what it dubbed the “Great Inflation.” Stricter monetary policy plus rising inflation sent mortgage rates soaring to a record 18% in 1981 and plunged America into a housing slump as well as an economic recession.
The housing market crashed again (meaning affordability, sales, and construction plummeted) in 1994-1995 after the Fed increased its target rate from 3% to 5.5% in one calendar year to thwart an overheating economy, but, that time, an economic recession did not follow.
The last official housing recession in 2022 was not followed by an economic recession, Kushi continued.
And 2020’s global economic recession caused by COVID-19 lockdowns did not cause the housing market to fall into a recession. (Quite the opposite — lower mortgage rates and the shift to remote work induced by the pandemic sent the housing market soaring.)
As for America’s current economic cycle, Kushi reports 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,” she said. “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.”
Kushi’s findings and analyses are available in her blog “Did Falling Mortgage Rates Prevent a Housing Recession?“
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