Why Real Estate Is Considered Recession Resilient: The Importance of Housing in a Struggling Economy
Real estate has long been considered a recession-resilient asset class, meaning it tends to hold value and remain somewhat stable during times of economic downturn. While there are a number of factors that contribute to this resilience, one of the most significant is the essential nature of housing. Unlike luxury goods or discretionary spending, people will always need a place to live, regardless of the state of the economy. Let’s explore why real estate is considered recession resilient and examine the importance of housing in a struggling economy.
Why is Real Estate Recession Resilient?
Real estate is considered recession resilient for a number of reasons. First, real estate has a tendency to maintain its value over time, even in the midst of economic recessions. This is due to a number of factors, including that land is a finite resource, and demand for property tends to remain relatively stable over the long-term. Although the worth of individual properties may vary in the short run, real estate typically exhibits consistency and dependability as an investment.
Another reason why real estate is considered recession resilient is that it is a hard asset. Unlike stocks or bonds, which can be highly volatile and subject to rapid fluctuations in value, real estate is a tangible asset that can be seen, touched and measured. This gives investors a greater sense of security and stability, and can help to insulate them from the worst effects of economic recessions.
Finally, real estate is often a long-term investment. Unlike stocks or bonds, which can be bought and sold in a matter of minutes, real estate requires a significant investment of time and capital. This can make it more difficult to liquidate in the short-term, but it also means that real estate investors tend to take a longer-term view of their investments. This long-term perspective can help to protect real estate investors from the most detrimental impacts of economic downturns, as they are less likely to panic and sell off their holdings in a crisis.
The Importance of Housing
One key reason real estate is able to withstand recessions is because housing is a basic necessity; people will always need a place to live, regardless of the state of the economy. This means that demand for housing tends to remain relatively stable even during times of economic uncertainty. In essence, when we refer to "housing," we encompass not only the concept of a dwelling place but also the broader realm of single-family residences, privately rented properties, and multifamily assets within the commercial real estate sector.
Housing, beyond its essential nature, plays a pivotal role in driving economic growth. Through the construction, upkeep, and diversity of residential properties - including dwellings, single-family rentals, and multifamily commercial real estate - jobs are created, economic activity is generated, and homeownership becomes a steadfast wealth-building platform, fostering social harmony. This means that investing in real estate can be a way to support economic growth and stability, no matter the state of the economic landscape.
Insufficient Supply and Consistent Demand
Another reason why real estate is considered resistant to periods of economic decline is that there is often insufficient supply to meet demand. As populations grow and urbanization continues, the demand for housing tends to increase over time. However, the supply of available land and housing units is often limited, particularly in urban areas where space is at a premium. This can create a situation where demand outstrips supply, leading to rising prices and a competitive market.
While this can make it more difficult for first-time homebuyers to enter the market, it also means that real estate, in particular commercial real estate in asset classes such as multifamily, is a valuable asset known for its long-term value retention. Even during times of economic uncertainty, demand for housing tends to remain relatively stable, meaning that the value of real estate is less likely to plummet as it might with other assets. To add context, consider this - during ‘The Volcker Shock’ of the 1980s, Paul Volcker, Chairman of the Federal Reserve, hiked short-term interest rates to an astounding 19%, which was even higher than the peak inflation rate at the time. While this had varying degrees of pain on the housing market, including single family housing, prices collectively declined 6.7% by the end of 1982 (adjusted for inflation) The multifamily deceleration in contrast, was much smaller - with the average rent only dropping 2.4% in 1980 and another 1.8% in 1981. Fast forward to the Great Recession (Dec. 2007 - June 2009), which saw a nearly 30% drop in average home prices from their mid-2006 peak to mid-2009 trough². While demand from investors and households disappeared for single family homes, multifamily properties served as a housing substitute, helping to keep rents steady until nearly the end of the recession.¹
¹ Moody’s Analytics - What Would a Recession Mean to the Multifamily Market? July 2022
² Federal Reserve History - The Great Recession, November 2013
In conclusion, real estate has earned its reputation as a recession-resilient asset class due to several key factors. The essential nature of housing, as a basic necessity for individuals, ensures that demand for housing remains relatively stable even during economic downturns. Moreover, real estate's value retention over time can be attributed to its status as a finite resource and the tangible nature of property as a hard asset. The long-term perspective taken by real estate investors further protects them from the worst effects of economic recessions.
Additionally, the importance of housing extends beyond its essential function, as it drives economic growth, job creation, and serves as a platform for wealth-building and social harmony. Insufficient supply and consistent demand contribute to the stability of real estate values, particularly in the commercial sector such as multifamily assets. Overall, real estate's resilience during times of economic uncertainty makes it a reliable investment that supports both individual portfolios and the broader economy.
Frequently Asked Questions (FAQs)
What makes real estate a recession resilient asset class?
Real estate is considered a recession resilient asset class for several reasons.
Real estate tends to hold its value over time, even during economic downturns. This is due to a number of factors, including the essential nature of housing and the limited supply of available land and housing units.
Real estate is a tangible asset that can provide a sense of stability and security for investors, particularly during times of market volatility.
Real estate is often a long-term investment, which can help to insulate investors from the worst effects of economic downturns.
How does the importance of housing contribute to the recession resilience of real estate?
Housing is a basic necessity, and people will always need a place to live, regardless of the state of the economy. This means that demand for housing tends to remain relatively stable even during times of economic downturn. Additionally, the construction and maintenance of housing can contribute to economic growth and stability, making real estate an important asset class during times of market volatility.
What role does supply and demand play in the recession resilience of real estate?
There is often insufficient supply to meet consistent demand for housing, particularly in urban areas where space is at a premium. This can create a situation where demand outstrips supply, leading to rising prices and a competitive market. While this can make it more difficult for first-time homebuyers to enter the market, it also means that real estate is a valuable asset that tends to hold its value over time. Even during times of economic downturn, demand for housing tends to remain relatively stable, meaning that the value of real estate is less likely to plummet as it might with other assets.
How can real estate investors benefit from the recession resilience of this asset class?
Real estate investors can benefit from the recession resilience of this asset class in a number of ways. First, investing in real estate can provide a stable source of income and wealth, particularly if the property is rented out or used as a long-term investment. Additionally, real estate can provide a hedge against inflation and market volatility, as the value of the asset tends to hold up over time. Finally, real estate can be a way to support economic growth and stability, particularly if the property is used to create jobs or promote social stability in a community.
Learn More About Successfully Investing in Real Estate
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