Are We in a Recession—or a Depression? How Each Would Affect Housing

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The past two coronavirus-ravaged months have left many folks wondering if the nation is in the throes of another deep recession—or maybe even a repeat of the Great Depression of the 1930s.

Which of these bleak scenarios is more likely? And what’s the difference between them, anyway?

Most economists consider a recession to be a period of time with at least two consecutive quarters of negative growth. Translation: There’s high unemployment and a whole lot of financial pain. (It’s a little more complicated than that, but we’ll get into that later.) Whole generations are still scarred from the Great Recession, which was just over a decade ago and still fresh in the memories of many who lost their jobs, their savings, or their homes during the downturn.

So what is an economic depression? While the phrase is commonly bandied about, and the internet is littered with definitions for it, most economists agree that there’s no formal consensus on what, exactly, defines a depression. Economists that realtor.com® interviewed say it depended on the severity and length of the crisis. The longer it lasts and worse it is, the more likely they’d be to call it a depression.

“You know it when you see it,” says Lawrence J. White, an economics professor at New York University. “There’s no question that at the moment we’re in a recession. And we could well be replicating the depths of the Great Depression—only getting there a whole lot faster than we did 90 years ago.”

Around the Great Recession, unemployment peaked at 10% in late 2009. That crisis lasted about a year and a half, starting in December 2007 and ending in June 2009. Meanwhile, unemployment hovered around 25% in 1933, during the worst of the Great Depression. The depression lasted for about a decade in the 1930s, until World War II pulled the country out of its dire straights.

Since the COVID-19 crisis began in mid-March, more than 33 million have filed for unemployment. Unemployment, including furloughs, is expected to be somewhere between 15% and 20%. That’s roughly 1 in 5 American workers who isn’t working.

The financial markets have been on a wild, retirement-destroying ride. And an untold number of businesses deemed nonessential have been forced to close to stem the spread of the deadly virus.

“This current situation is unique. There’s no doubt that the economy has stopped growing, at least temporarily,” says realtor.com® Chief Economist Danielle Hale. “It’s an open question as to how long this will continue, and that could affect whether or not they call this time a recession. The severity of the decline could affect what they call this, too.”

Most economists defer to the National Bureau of Economic Research to designate a recession, as well as its start and end date. The nonprofit economic research organization, made up of prominent research economists, defines a recession as a significant decline in economic activity spread across the economy that lasts more than a few months. The group looks at factors like employment, gross domestic product, real income, industrial production, and wholesale-retail sales when calling a recession.

As depressions aren’t an official economic term, the bureau isn’t likely to say we’re in one. And, hopefully, it won’t come to that.

Economists are hopeful that the federal stimulus checks and small-business loans, a proactive Federal Reserve, which slashed short-term interest rates to between 0% an 0.25%, and mortgage forbearance will help to stave off utter disaster and help the economy to recover faster.

During the Great Depression, there were many negative forces at work: the collapse of the stock market, a banking crisis, the Federal Reserve raising interest rates instead of lowering them—and the Dust Bowl, severe dust storms that devastated the southern Plains region of the nation

This time, the world has the novel coronavirus to blame for the economic upheaval.

“We know one thing caused our recession: shutting businesses,” says Dan North, senior economist at Euler Hermes North America. The company insures clients against nonpayments. “At some point, most of the governors are going to say you can go back to work now.”

But states reopening won’t be a panacea for the financial woes of many businesses. Some fear the reopenings are too soon and could backfire if they result in a surge of new cases and deaths leading to another lockdown. Plus, no one knows if and when customers will return en masse.

“It’s the customers who are making the decision as to whether it’s safe to come and patronize restaurants and bars and gyms and salons,” says realtor.com’s Hale. “It’s definitely not going to be 100% of people who return. Some people will try to minimize their own risk.”

Recession vs. depression: What each would mean for housing market

A decade ago, the Great Recession unleashed true devastation upon the housing market. It was a toxic combination of bad mortgages, real estate speculation, and an oversupply of homes that plunged the world economy into disaster.

This time around, the housing market isn’t to blame for the downturn. So it’s unlikely it will be hit nearly as hard with a rash of foreclosures and rock-bottom prices. However, that doesn’t mean real estate will emerge unscathed.

“This go-round, housing is going to weather the storm much better,” says Mark Zandi, chief economist of Moody’s Analytics. “The housing and mortgage markets were in much better shape coming into this than those markets were prior to the [2008] financial crisis.”

Even if this remains a recession, and not a depression, fewer homes will be sold until the economy picks up.

With tens of millions of people out of work, there won’t be as many folks who can afford to get into the housing market. Many would-be buyers will be forced to dip into down payment savings to weather the storm, which will set them back in the home-buying process.

During the Great Recession, median home prices fell about 30% from their peak in 2005 to the trough in 2011. In this decade, experts are expecting they could slip by a percentage point or two, but overall prices are expected to remain flat. That’s because so many sellers pulled their properties off the market due to the pandemic. So the balance of supply and demand, which determines home pricing, hasn’t shifted.

“In a normal recession, sellers will try to wait it out,” says Hale. “The number of listings fall as folks wait until the economy improves and they can score top dollar for their properties. Only people who have to sell will choose to sell.”

Meanwhile, during the Great Depression, prices dropped about 25%. If this turns out to be more like a depression, prices will likely come down further and there will be fewer home sales.

“If this turns into a more prolonged downturn, I don’t think it will change the desire for people to buy homes,” says Hale. “But it will make it more difficult for them to make that a reality.”

The nation could also experience another wave of foreclosures if the high unemployment continues once the mortgage forbearance period ends. Borrowers with the most government loans as well as many private ones are eligible for up to 12 months of forbearance (i.e., missed payments) if they’ve lost income due to the pandemic. (They must work something out with whichever company holds their loans instead of just skipping payments.)

“The hope is that anyone’s who’s had to delay their mortgage payments can get a job in the next 12 months so we don’t see another foreclosure crisis,” says Ali Wolf, director of economic research at Meyers Research, a national real estate consultancy.

When will the economy rebound?

The nation’s current suffering may resemble a depression more than a recession.

But just how prolonged the pain is will likely be the deciding factor. Unfortunately, no one knows how long it will take for the nation to regain its economic footing.

Realtor.com’s Hale as well Euler Hermes North America believe that if the nation’s reopening goes well, the economy could improve by the summer. Hale is hoping unemployment drops into the single digits by then. Zandi predicts the downturn “will be counted in months and not in years.”

However, a resurgence in the number of COVD-19 cases and deaths could throw a wrench in those predictions.

Others, like New York University’s White and Meyers Research’s Wolf, expect it will take closer to two years for the economy to get back to where it was before the virus.

“If the states that reopened their economies prove to be successful, we can avoid a depression,” says Wolf. However, “I don’t think the unemployment goes back to [pre-crisis] 3.5% anytime soon.”

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