What a Recession Could Mean for the Housing Market

President Donald Trump’s new tariffs have raised fears that a trade war will plunge the U.S. economy into recession, which would have major implications for the housing market.

Since Trump announced his sweeping "reciprocal" tariffs on most trading partners on April 2, the benchmark S&P 500 has dropped for four straight trading sessions, plunging more than 12% altogether. The sell-off has wiped out more than $10 trillion in total value from the stock market.

JPMorgan Chase CEO Jamie Dimon, who has previously supported tariffs, said on Wednesday that recession is now "a likely outcome" as households pull back on spending in response to their shrinking 401(k) and investment account balances.

Following Trump’s "Liberation Day" tariff announcement, J.P. Morgan analysts raised their forecast of the odds for a global recession to 60%, up from 40% just a few weeks ago. Likewise, Moody’s Analytics Chief Economist Mark Zandi raised his recession outlook to 60%. 

Even billionaire hedge fund manager Bill Ackman, a vocal Trump supporter, warned that the world is on the brink of “self-induced economic nuclear winter” as he pleaded for the president to pause his new tariffs.

A recession is a significant slowdown in economic activity across multiple sectors, lasting more than a few months, according to the National Bureau of Economic Research, which is charged with officially declaring recessions. 

Recessions are typically marked by a slowdown in hiring, an increase in layoffs, and a rising unemployment rate. However, a recession is not the same thing as a stock market crash—although a steep enough decline in the market can trigger a real economic slowdown.

Although recession fears are rising, it is not a guaranteed outcome. Trump has insisted that his plan will boost the U.S. economy, and he may strike beneficial deals with key trading partners, reducing the economic fallout from his tariff scheme.

Still, even economic uncertainty can affect the housing market, giving homebuyers pause as they weigh what could be the largest single purchase of their lifetime.

What a recession would mean for home prices and sales

By definition, a recession brings higher unemployment, increasing financial strain for many households. As a result, buyer demand pulls back and home sales fall. 

Falling buyer demand would put downward pressure on home prices, as for-sale inventory starts to pile up and spends more time on the market.

However, the housing market is already fairly soft, with home sales near record-low levels. Last year, home sales were the slowest since 1995, and early data from this year has shown little improvement.

“Though a recession would mean buyers pull back even further, there isn't much further to fall, so the drop would likely be tame relative to recent sales volume,” says Realtor.com® senior economic research analyst Hannah Jones.

Still, a recession could exacerbate current regional divides in the housing market, which has seen the supply of homes for sale surge in the South and West, while inventory remains tight in the Northeast and Midwest.

According to the Realtor.com March housing data, inventory is nearly back to the pre-pandemic average in the West and South, where it is down just 2.1% and 3.2%, respectively. But in the Midwest and Northeast, there’s still a long way to go—inventory is down 45.2% and 57.5%, respectively.

“Regions with more home supply, such as the South, would likely see home prices fall more quickly in a recession as buyer demand pales in comparison to already ample home supply,” says Jones. “Under-supplied areas, such as the Northeast, could see prices hover longer before falling, as the pullback in demand actually allows for more balance in the market.”

Although a severe recession can force some homeowners into selling because they are no longer able to afford their mortgages, most current homeowners (54%) have a mortgage with a rate below 4% and are relatively well-equipped to make their housing payments, says Jones.

Homebuilders, who are already facing cost pressure from tariffs, would likely pull back sharply on new construction in a recession, exacerbating the existing housing supply gap.

In short, the impact of a recession on the housing market could be noticeable without being catastrophic, and primarily an extension of pre-existing trends: fewer buyers, rising inventory, and softening prices.

If home prices did correct, homeowners are in a healthy position to absorb the adjustment, after enjoying rapid equity expansion due to rising home prices in recent years. 

Even if homes were to lose 10% of their value overnight, aggregate homeowner equity would still be at 69.5% of total value, similar to where it stood in late 2021, according to a Realtor.com analysis of Federal Reserve data.

Using this same framework, a 20% drop in home prices would leave homeowner equity at 65.6% of real estate value, on par with what we saw in 2019.

What a recession would mean for mortgage rates

Mortgage rates typically fall during a recession as investors shift their money to bonds for reliable returns as they ride out uncertainty. 

This drives up bond prices, lowering yields. Mortgage rates tend to follow the yields on 10-year Treasury bonds.

This effect was in evidence late last week, as long-term yields plunged below 4% during a selling panic in stock markets. Daily mortgage rates briefly dropped to their lowest of the year, before bond yields and mortgage rates rose back higher this week.

An economic downturn would also prompt the Federal Reserve to loosen monetary policy, resulting in lower borrowing costs. Although Fed policy primarily affects short-term borrowing costs, it indirectly influences long-term interest rates as well.

In summary, a recession would lower mortgage rates, but for painful reasons. 

Lower rates in a recession would certainly benefit existing homeowners seeking to refinance, but for prospective homebuyers, the fear of losing their jobs might outweigh the benefit from lower rates.

How homebuyers can prepare for a recession

According to Jones, the best way homebuyers can prepare for a recession is to make sure they have plenty of financial leeway on their mortgage payments.

“Take stock of your financial situation. Don't take on a housing payment that will be a stretch to afford even in the best of times,” she says.

If buying a home is only marginally affordable, Jones says to consider renting, which is cheaper than buying in much of the country and allows you to keep your down payment savings relatively liquid, just in case the job market loses its footing. 

Realtor.com Chief Economist Danielle Hale says that maintaining an emergency fund that can cover at least several months of expenses is key for preparing for a downturn.

“It's always a good idea for homebuyers to have a good, solid emergency reserve fund, and that's especially true now as uncertainty is high,” she says.