What Causes a Housing Recession?

Felicia Dye

A poor economy can cause a housing recession. One reason for this is because there are often high unemployment rates, which deem many ineligible to buy houses while causing others to worry about their future financial state. There are several ways that credit availability can negatively impact the housing market also, such as by limiting access to loans.

House sales drop during a housing recession.
House sales drop during a housing recession.

It is often very difficult to pinpoint a single cause for a particular housing recession. There are a number of factors that can be blamed for such a problem. In many instances, several causes exist either simultaneously or within close proximity to one another, creating adverse effects on the housing market.

Many houses on the market remain unsold for long periods of time during a housing recession.
Many houses on the market remain unsold for long periods of time during a housing recession.

One problem that can cause a housing recession is limited access to credit. Although many people use their own finances to make down payments, most do not completely purchase homes out of pocket. Instead, they seek loans which they generally repay over long periods of time. When lenders are hesitant to make home mortgage loans, housing sales are negatively impacted because many individuals no longer have the finances to buy a home.

Sometimes credit can be too easy to obtain or it can be too cheap. When this happens, massive numbers of people can become irresponsible and overburden themselves with excessive debt of various kinds. As a result, many will begin to default on some of their debt repayments, which will negatively affect their credit worthiness. Others may maintain their repayments according to the terms but due to the amount of debt they already have, lenders will not provide more credit, which prohibits them from obtaining financing for a home.

High interest rates can also contribute to a housing recession. In some instances, lenders are willing to loan individuals money, but the costs are discouraging. Interest determines how much money above the borrowed amount a person will have to pay to satisfy his debt. When the interest rates are high, requiring people to repay lenders substantially more than they borrowed, many will choose not to buy a home.

A poor economy is another possible cause of a housing recession. When the overall financial state of a place deteriorates or if it appears that this will happen, consumers often lose confidence and they become hesitant about spending money and creating new debt. This means people are unlikely to make major purchases, such as those involving homes.

High unemployment rates are often an indicator of an ailing economy. It can also be a major factor in a housing recession. To purchase a home and maintain the mortgage for it, most people need to work. People who are unemployed generally do not qualify to purchase homes even if they wanted to. Furthermore, high unemployment rates often stimulate fears among those who are working that they could lose their jobs, so they avoid purchasing homes.

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