What Past Financial Crises Have Meant for Real Estate

Home sales in the United States were on an eight-year bull run, with rapidly rising prices in many markets, before the hot streak ended in the spring of 2020.

The National Association of Realtors adjusted its 2020 forecast for U.S. homes sales downward by 15 percent for the year, with a recovery expected in 2021. When unemployment soars and financial markets are ridden with uncertainty, real estate is affected.

But there have been financial crises before, and real estate has suffered but survived. Here’s what past financial crises have meant for real estate.

The early 1980s recession

Technically, there were two recessions in the early ’80s: a short one in 1980, then a deeper one in ’81 into ’82. Unemployment was over 10 percent for the first time since the end of World War II, and interest rates were high.

The high-interest rates and inflation made it more expensive for homebuyers, but commercial real estate took off in the early part of the decade. Real estate became a tax shelter of sorts with the passage of the Recovery Act, and outstanding debt on commercial properties soared from $250 billion to $745 billion in the ’80s, according to the Commercial Real Estate Development Association.

The tight monetary policy meant to combat inflation led to the ’80s recessions, and the shrinking of the economy helped cause a mini-crash for commercial real estate. Residential real estate was largely unaffected, with median home sale prices actually rising 32 percent from 1980 through ’85, according to the U.S. Census Bureau.

The 1990-1991 recession

The recession that began in 1990 is largely attributed to what’s known as the Savings & Loan Crisis. It occurred when federally insured savings and loan institutions – about 1,000 of around 3,200 in existence – failed with billions of dollars of loans on the books.

Residential real estate had direct involvement, as many small banks had extended mortgages on homes amid a real estate-friendly time for tax and regulation.

Still, home prices only took a small dip of about only 7 percent, according to the Case-Shiller Home Price Index. Also, it was the major metropolitan areas that took the biggest hits, according to the Case-Shiller index.

The Great Recession

The last big crash, the Great Recession of 2008, was directly caused by a collapse in the mortgage industry that was preceded by a real estate bubble. Subsequently, U.S. home prices suffered the steepest drop in recorded history, with the median sales price of existing homes falling more than 25 percent. People lost homes to foreclosure, and U.S. homeowners lost over trillions of dollars in equity.

The lessons

Maybe the most obvious lesson is that the more entangled residential real estate was in the causes of the recession, the worse it fared.

Home prices actually rose in the early 1980s, when commercial real estate experienced its bubble, and residential real estate was more of a spectator. Home values fell only slightly during the Savings & Loan Crisis when residential real estate was more of a player. In 2008, a real estate bubble fueled by speculation and the easy money of sub-prime mortgages was a direct cause of the recession, and what followed was the worst period in the history of U.S. real estate.

In the spring of 2020, real estate was rolling along. Home prices in a lot of markets were high and still rising, but adjusted for inflation still weren’t at peak levels as in 2006. There was no bubble, and residential real estate was healthy. Sudden unemployment led to recessionary traits in the economy, not real estate.

Historically, that’s meant that home prices don’t change that drastically. Due to pent-up demand, markets that were healthy prior to the crisis might be even healthier afterward. In short, only once in U.S. history did residential real estate play the biggest role in a final crisis, and that was the only time U.S. home sales suffered greatly.