Real Estate and Recessions

Talking to a local investor about the market back in September, he said to me “I’m 100% certain things are going to be good, until they go bad”. He’s not wrong.

The good was the economy while the bad is Covid-19. In a matter of months, it halted our schools, work, restaurants, and bars. We reached a bear market faster than we’ve ever seen before.

This black swan event, or white swan event, has caused plenty of discussion about what a recession could look like for each business. Rather than project what could happen, I want to look back at how residential real estate has fared in previous recessions.


On a macro level, things were looking promising before the slowdown of Covid-19 in real estate. We had in our favor what Jonathon Grey of Blackstone call the three 3’s. Unemployment was low at 3.7%, wages were growing north of 3% and home prices were growing north of 3%. On top of that, interest rates were near an all-time low for buyers and those looking to refinance.


While that sounds great, macro housing level statistics for most of us in real estate aren’t relevant in my opinion. At the same time, Seattle’s market could be extremely hot while Detroit's could be ice cold. Real estate is a business catered around local knowledge and city/neighborhood data that’s unique to each area.

With that in mind, lets take a look at previous recessions in regards to Washington state specifically king county.

The data below is for median home prices, inflation adjusted in king county from 1946-2007. We’ll get to 2008-2009 data later.


The work above was done by Tim Ellis where you can find the whole article written in early 2008 here.

What we want to focus on are the years where recessions took place. We're going to start in 1970 and keep in mind this data is only residential home prices in King County.

1970 and 1973-1975

-Prices dropped the most in 1970 by 8.59%.

-From 1971-1975, prices declined anywhere from 2% to 4%.

-The next time we saw all time highs was in 1977, a 7 year span to get back to previous levels.

-Prices rose by 33.27% over the next two years

1980-1982 -Max drop was 6.81% in 1980 followed by 5% the next two years. This was the biggest drop as a percentage until 2008.

-Prices took roughly 10 years to get back to 1979 values.

1990-1992 -The market declined just 2.82% over a two year period before rising by almost 53%(!) until 2007.

-3 years was all it took to get back to all time highs

2000-2001 -Prices increased by 5% during 2001.

-The "slowest" time during this period was a price hike of just over 1%.

-This is the one recession from the above dates where prices never declined but rather continued climbing.


Now lets take a look at prices during the 2008-2009 recession. The numbers in the graph below were taken from the MLS.



2008-2009 -Prices bottomed out in January 2012 at $434,361 (adjusting for inflation in 2020).

-The peak to trough (June 2008-Jan. 2012) resulted in a loss of 33.58%.

-Market started reaching all time highs again in June 2014

-Pricing has gained 40.63% from January 2012 through today.


Key Takeaways

-King county is very resilient

-Longest decline in pricing was a 5 year stretch dating back to 1970

-prices rapidly rise once hitting the bottom

So what does this tell us about the upcoming recession? Not a whole lot. The best way to look at this data moving forward, in my opinion, are the ranges that occurred.


Yes it's scary to think about another 30% drop in prices. On the other hand, it's exciting knowing prices could be greatly discounted with the potential to rise 40% again. We could also see a period of prices leveling off for a couple years that buyers have been wanting for some time now.


It's completely OK to be short term pessimistic while also being long term optimistic.


If I had to guess, I can see inventory going up in the short term, interest rates remain low for a couple years, material costs going up, labor prices going down, and average sales price falling for a couple years.


How much for all the above scenarios? I have no clue and not sure if anyone really does.


King county was one of the stronger markets before Covid-19 showed up. Prices were up year to date 11.6%, inventory was at 1.2 months (normal inventory should be at least 4 months) while job/wage growth was continuing up and to the right.


How are buyers and sellers going to react? We'll find out soon. What I do know is that we’ll get through this.


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