Is a Recession Impossible With Rising Home Prices?

One thing I keep reading all over the place is this myth that a recession won’t happen because residential real estate is appreciating.  Of course, the implication is that rising prices mean increased residential real estate activity, etc.  But the reality here is that recessions just about ALWAYS occur with home prices still appreciating.

As you can see in the chart below, in the last 40 years recessions have always occurred with rising home prices (with the exception of the 2008 recession).

Now, I’m not in the “recession is coming” camp and I’ve been pretty vocal in expressing this sentiment (especially in the last year), but the US economy is much bigger than its real estate market and tends to experience volatility over the course of the business cycle that doesn’t involve contraction in US housing prices.  US real estate is generally a very steady component of the US economy which is what made the recent recession such an anomaly.  But I think there’s a nasty case of recency bias leading people to make unfounded statements about how real estate expansion/contraction plays a more important role in economic contraction or expansion.  Clearly, the history of the last 40 years shows that the US economy can contract without real estate prices contracting.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Romeo Fayette

    Might need context here, because housing’s share of GDP spiked in the last 15 years. Truth be told, residential fixed investment + housing services have waned since 1970s (19% of GDP v 18.6% in 2005 v 15.1% in 2011). But, financial services have swelled via the derivatives of housing. FIRE industries have piggybacked on the real estate story, doubling their share of GDP in the post-war era. By way of comparison to residential investment, FIRE industries have grown from 22% in 2006.

    When guys like Bill McBride cite residential investment as a vote for GDP resurgence, I think it’s implicit that there’s a resonance to other sectors–including traditional finance & shadow banking, which are huge dead weights since 2008-9.


    Also, the OECD had a great paper on the state of global housing earlier this year. It provides great context for this discussion:

  • SS

    Why does everyone suddenly think McBride is some sort of great prognosticator? All he does is post charts and vague comments.

  • Matt

    I thought the argument wasn’t about home prices, but rather about increasing starts from such a low level that it is highly unlikely that housing will create a drag on the economy. While true, this misses the point that a drop in business spending is usually what leads to recession, not a drop in housing activity.

  • Romeo Fayette

    That should read: “By way of comparison to residential investment, FIRE industries had grown from 22% in 2006.”

  • enedene

    I know this is not on topic, but where are the youtube videos for explaining the MMT?

  • Hans

    Very interesting chart and counter intuitive…

  • Cullen Roche

    I am not an MMT proponent. Haven’t been for almost a year. We started MR because we thought there were some errors in the MMT framework.

    See here:

  • enedene

    Have you made youtube videos of MR perhaps?

  • Cullen Roche

    I have not yet. Been swamped. I’ll get around to it at some point. Sorry.

  • Romeo Fayette

    That’s all I use him for: his charts. I don’t trust McBride any more than any other prognosticator–I do my own work.

  • Romeo Fayette

    I guess I had some html inputs that were screwing up this comment; one more time:
    “By way of comparison to residential investment, FIRE industries had grown from under 14% in 1970s to over 22% in 2006.”

  • hangemhi

    I thought it was about expansion of credit. Housing leads recoveries when households are taking on more debt than before to purchase houses, not merely because prices are going up. In fact, housing prices can go up on declining sales, so no new debt is being added. That’s what happened towards the end of the bubble.

  • enedene

    Thanks for the info.

  • Greg

    One thing that does stand out though is that every recession was during a general downward trend. Yes there were increases during parts of the shaded time periods but a down ward trend in house prices is usually recessionary it seems. I agree that these upticks in house prices dont necessarily signal the end of recession but the recession wont end til we have more and more upticks.

  • LVG

    It looks like the 91 recession started with rising prices.

  • wallyfurthermore

    There’s a difference between rising back to the norm and rising while over the top.

  • Andrew P

    House prices were not falling at all until the 2008 recession – a source of the delusion that house prices never go down. The graph Y axis shows a % change from a year prior, and did not dip below zero until then. However, each recession (except 2001) is preceded by a sharp reduction in the rate of house price growth. Of course, the house price bubble was already well underway in 2001.

  • JH

    I am not sure what chart he is looking at, but the one I see posted shows falling real estate prices preceding all but one recession, and falling simultaneously in 2001.

  • Matt

    JH, that is a rate of change graph. If it is above 0, that means home prices are rising. So while the rate of growth may have been decelerating, prices were still rising.

  • ML

    hangemhi nailed it.

  • Mikael Olsson

    Cullen: This is also a relevant graph; total household debt YoY change:

    And UNLESS the compounding function is fooling me, the recessions are preceded by the debt increase ratio starting to taper off.

    Except for the dotcom bubble crash but I think we all agree that was a special kind of “recession”.

  • Mikael Olsson

    It also strikes me that this graph is probably a better inflation meter than CPI. And an excellent predictor for when it is time to stimulate the economy to stave off the drop.

    But what do I know, I’m a mere engineer with a hobby interest in macroeconomics.

  • Mikael Olsson

    Late comment but for posterity..

    The all-transactions composite has major problems – it only shows actual sales, and spread out over the whole country. If one or several states slow down, still-healthy states dwarf the numbers entirely.

    This is GeoFRED showing developments quarter by quarter:

    Now if I could only get this as a heatmap over time…