Falling Home Prices Do Not Always Accompany Recessions

• In the housing-led Great Recession, home values fell significantly across the country. But during the tech bust recession of 2001, home values broadly continued to rise faster than inflation.
• Outside these two national recessions, several states have had slowdowns similar to national recessions, during which home value growth stayed positive.

As U.S. economic growth slows, many market observers worry about a reprise of the housing bust that accompanied the Great Recession. While it is true that housing and the broader economy are linked, there is good reason to doubt that we will see another collapse in prices for the housing market. Evidence from other recessions in the last 23 years shows that it is perfectly possible for the country, and individual states, to go into recessions without accompanying drops in home values.

There have only been two national recessions in the time frame covered by Zillow's home value data: the dot-com bust from March to November 2001, and the Great Recession from December 2007 to June 2009, as dated by National Bureau of Economic Research. Outside these time frames, however, some isolated parts of the country experienced slowdowns in economic activity.

Several states with large energy sectors experienced the local equivalent of recessions when oil prices fell dramatically. In particular, Alaska, Louisiana, North Dakota, Oklahoma, and Wyoming each fell into recession starting in 2015, for durations ranging from about half a year to 1.5 years. But home values did not fall in any of these states at any point in their localized recessions; in fact, annual home value growth averaged 4.3%, compared to 5.2% average growth in states that experienced economic expansion in 2015 and 2016.

Home values did fall broadly across the country during the Great Recession. Out of 950 state-month observations from December 2007 to June 2009, only 203, or 21%, showed positive state-level home value growth; only 68, or 7%, had state-level home value growth higher than 2%, the long-run inflation target of the Federal Reserve.

However, in the 1,039 state-month observations of other recessions since 1997, either the dot-com bust or individual state-level recessions, home value appreciation was positive 81% of the time — and 74% of the time, it was above 2%. This was nearly identical to the rates of home value appreciation for state-months in economic expansion, of which 81% saw positive growth in home values, and 70% had appreciation greater than 2%.

That means home values were positive just as often during the dot-com bust and the state-level recessions as during economic good times. One caveat to these figures is that the prolonged housing bust both preceded and outlasted the technical duration of the Great Recession, so while some of those negative months of home value change are being accurately counted as expansionary months, it's clear that they are related to the Great Recession.

Generally, home value appreciation averaged 4.6% in state-months experiencing economic expansion; slightly lower at 4% in recessionary periods outside the Great Recession; and negative 4.6% during the Great Recession.

The bottom line: Falling home prices have not always accompanied recessions in the 21^st century.

Methodology

We estimated state-level recessions using the Bry-Boschan method outlined by Jason Brown of the Kansas City Federal Reserve Bank, which uses monthly State Coincident Indexes published by the Federal Reserve Bank of Philadelphia. Brown specifies a minimum business cycle of 24 months with a minimum phase of six months. In this analysis, we allow for a minimum business cycle of 12 months and maintain the six-month threshold for each phase of the business cycle.

We then merged these state-level recession estimates with Zillow Home Value Indexes at the state-month level to assess what has historically happened to home values during state-level recessions.

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