Consumers turn pessimistic on home price growth in a downturn

Consumer sentiment about home price growth during a potential recession flipped because of the coronavirus scare. Now, just one-third expect an increase in value, a March survey from Redfin found.

A similar question asked in December found more than half of buyers and sellers, 56%, believed prices would continue to rise in a recession.

On the other hand, the share of those surveyed regarding a price decline in their local area increased 19 percentage points, rising to 44% in March versus 25% in December.

Other than the period following the financial turmoil caused by the housing crisis, home prices have risen during recessions. And if there is one coming now, market circumstances will likely cause prices to rise.

"It's easy to become fearful when it feels like a recession is imminent, but it's important to remember what has actually happened in past recessions," Redfin Chief Economist Daryl Fairweather said in a press release.

"Home prices declined substantially during the Great Recession, which started with a housing crash, but throughout the 2001 recession home prices actually rose due to a nascent housing bubble and a shift in investment dollars from the stock market into real estate. It's perfectly reasonable to expect that a 2020 recession won't stop home prices from rising, since the supply of homes for sale is so constricted and mortgage rates are at all-time lows."

In particular, the shift in sentiment is most pronounced among those under the age of 45, a group that includes millennials, considered to be the next big source of home purchase demand.

According to the March survey, 31% of this group expects prices to rise in a recession, down from 62% in December. Meanwhile, 47% now expect prices to decline, more than double the 21% that felt similarly three months ago.

For those 45 and older, who were adults during that recession 19 years ago, the survey results were more balanced. In March, the results found that 39% said prices would decline, while 37% said they would increase in a recession. That is a less stark change from December, where the result were 34% decline and 43% increase.

No matter what, homeowners need to be prepared to deal with a worst case scenario.

"Even though it's likely that home prices may be insulated during the next recession, it's a good idea for every homeowner to have an emergency fund in place just in case their home loses value and their income declines simultaneously," Fairweather said. "Young homeowners who don't yet have much in the way of savings or equity should especially be thinking through worst-case scenarios."