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 widely-accepted meaning of “recession” is the one from the National Bureau of Economic Research (NBER). They define it as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” That means the decline has to substantially affect multiple economic sectors for an extended period of time to be considered a recession.

This definition is helpful if you always have your eye on the economy, but the average person recognizes a recession more by its effects. In a significant recession, the public generally experiences job loss or lower job security, in addition to less bargaining power in the workplace. Those 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 can impact your wealth accumulation for years to come as you catch up to the salary you could’ve had in a stronger economy. Additionally, your retirement and other investment accounts can take a hit during a recession due to rocky markets.

It’s also likely that you’ll have a more difficult time borrowing money. Like everyone else, whether in Palm Springs, or anywhere else in the country,  financial institutions tighten up during an economic contraction. This includes stricter rules, lower credit limits, and fewer types of credit available.

Are we in a recession?

Currently, no. Despite widespread fears, the U.S. economy is not currently 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 part of the economic cycle. If you imagine the economy as a series of peaks and valleys, a soft landing is a valley—but it’s shallow when compared to a major economic downturn. Central banks try 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, rapidly inflating economy without a severe and painful recession.

Where is the economy headed in 2023? Here are opinions from top economic experts:

U.S. Bank

Rob Haworth, 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, a 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.”

U.S. Bank’s official forecast for the year has the U.S. economy narrowly avoiding a recession.

Bankrate

Bankrate’s poll of economists shows a 64% likelihood of the U.S. entering a recession in 2023. The financial company 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 the pattern between Federal Reserve actions and recessions that follow.

World Economic Forum

In January, the World Economic Forum released results in which two-thirds of surveyed economists predicted a recession in 2023. Their Chief Economist's Outlook, January 2023, stated, “Global growth prospects remain anaemic and global recession risk is high.”

Moody’s Analytics

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 contraction overall.

More 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 uniquely situated to handle it this time, 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. He 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 not inevitable. Some economists are predicting one by the end of 2023, and there are many variable factors that affect the economy outside of our control. Big ones right now include COVID-19 and supply chain disruptions, climate change, the war in Ukraine, and more. Even the experts have uncertainties, and as Alix Martichoux recently wrote for The Hill, “the economy right now is weird.” Most economists are forecasting some kind of economic slowdown—but if it’s a recession, it’s likely to be a “recession with a small r.”

What’s that? It’s a short-term, mild period of economic contraction. It can be uncomfortable, but it doesn’t have the far-reaching or devastating effects of a major Recession like the one in the early 1980s or the late 2000s.

Most experts believe that the strength of the labor market will be a major factor in preventing a severe economic downturn. There have been high-profile layoffs in the tech industry and consumer spending has started to slightly slow—but 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 is the strongest it’s been in over 50 years.

Why is this important? Because usually, “Rising unemployment is one of a number of indicators that define a recession. It also makes the downturn worse” (McGrath, 2022). That’s why U.S. Bank’s Rob Haworth says that ultimately at this point, it’s the job market that will dictate the economy’s direction. “If [the job market] starts to weaken, 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 bad. 

First, interest rates will come down as the economy slows. The Fed has hiked up rates to reduce consumer spending and inflation, but if the result of that is a recession, rates will go down again. For buyers, that means mortgages will become more affordable—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 good for you too. Buyers who have been sitting out of the market waiting for rates to drop will jump in, which means it could be easier for your real estate agent to find the right fit.

Second, buyers are likely to find lower home prices. Competition tends to be lower during a recession, which allows prices to drop. Additionally, a higher number of sellers are likely to reduce their prices to sell quickly or to get out of a mortgage. 

However, if you’re selling during a recession and your personal economic situation is good, you can take your time. How should you plan your sale when the economy is changing? Tell us what you’re trying to achieve, and we’ll help you get there.