Optimism is building that the economy might avert a recession.

The odds are shifting in favor of the U.S. Federal Reserve achieving its goal of bringing down inflation through interest rate hikes without plunging the nation into a downturn—at least for now.

But is a soft landing good for the housing market? Yes and no.

“Another recession is going to happen eventually,” says Realtor.com® Chief Economist Danielle Hale. “It’s really just a question of when.”

Skirting a recession would keep the demand for homes strong. People are generally reluctant to make the largest purchase of their lives and lock in steep monthly payments for the next 30 years if they’re out of work or worried about their job security.

However, a downturn could also bring down high home prices and mortgage rates. It could help to ease the housing shortage as more homes and foreclosures become available.

Many real estate economists believe a recession isn’t likely in the last months of this year, but they aren’t ruling out a downturn in 2024 and 2025. The impact of the Fed’s 11 interest rate hikes is still working its way through the economy.

“The prevailing sentiment is that we’re living through a soft landing, and I don’t think we have enough evidence to support that yet,” says Ali Wolf, chief economist of building consultancy Zonda. “There’s still a reasonable risk that we’re going to see job losses toward the end of this year or early next year.”

Typically, two to three years after the Fed begins raising rates, the economy falls into some form of recession, says Rebecca Rockey, deputy chief economist at Cushman & Wakefield. The Fed started raising rates about a year and a half ago, in March 2022.

“To believe we’ve seen the full impact [of the rate hikes] is probably not a very safe assumption,” says Rockey.

If the Fed doesn’t manage to pull off its soft landing and the economy does slide into a downturn, it’s not expected to be nearly as painful as the Great Recession. Many are optimistic it could last less than a year, and few anticipate mass layoffs on the scale of the late 2000s.

Moreover, today’s homeowners are better qualified to weather a financial storm than they were during the run-up to the financial crisis when it seemed like just about anyone could get a mortgage. That should prevent another wave of foreclosures and any drastic drop in home values.

“As long as it’s a mild recession, I don’t think it will have a big impact on the housing market,” says Wolf. “Some people will need to take on more debt and some people will lose their jobs, but I don’t think it will dramatically impact the lives of most Americans.”

A recession could boost the number of homes for sale

Ironically, an economic decline could be a boon to the housing market, which has been starved for homes for sale.

If homeowners can no longer afford their mortgage payments, more homes will go up for sale as folks move in with family or succumb to foreclosures. Wolfe anticipates a mild recession occurring within the next year that will last between six months and a year.

“If there are job losses that last for over six months, you could see some people who need to sell their home. That could free up some inventory,” she says.

More homes for sale could alleviate some of the offers over the list price and the bidding wars that have erupted over a very limited number of properties for sale.

But even a recession might not be powerful enough to meaningfully bring down home prices, particularly if it’s a brief one, says Wolf. It would likely force some would-be buyers to decide to pause their searches, but there are so many people searching for homes that demand is expected to remain strong. Add in a painful housing shortage, and the lack of homes for sale is likely to put up a floor under how much prices can fall.

“An economic recession increases [the likelihood] that you see prices come down a bit,” says Wolf. “But it doesn’t guarantee that prices come down.”

A recession could push mortgage rates down

An economic downturn might not make homes cheaper—but it could make them more affordable.

Once the economy runs into some trouble, the Fed is likely to reverse course and lower its interest rates. That should put some pressure on mortgage rates to decline. Rates are the highest they’ve been in more than 20 years, averaging above 7% for 30-year fixed-rate loans, according to Freddie Mac.

Higher mortgage rates are behind the slowdown in the housing market. Currently, sellers (who are also often buyers) don’t want to list their properties and give up the record-low rates they locked in during the pandemic. So they’re staying put. If rates go down, they’re more likely to sell, which would help to alleviate the housing shortage.

Meanwhile, lower rates equal lower mortgage payments. This could make homeownership more affordable, particularly for first-time buyers.

“The housing market tends to lead the economy out of recessions. We’re the first ones in and the first ones out,” says Odeta Kushi, deputy chief economist at First American Financial Corp. “As rates start to come down, people tend to transact. That gets the economy going.”

Could commercial real estate cause another downturn?

Many economists are worried that real estate could once again cause problems for the economy. This time, however, they’re focused on the commercial side over housing.

There are concerns that commercial real estate owners of offices, apartments, and other buildings could default on their loans in the coming years. These loans tend to be much shorter than a 30-year mortgage on a house. They often (but not always) span about three to 15 years. Many are interest only, while about half have floating rates. Many of these loans have a balloon payment due at the end of their terms.

Owners typically try to refinance their debt before they have a large balloon payment due, but interest rates are much higher than they were just a few years ago. Those higher rates are saddling owners with higher mortgage payments at a time when they can’t just raise rents enough to make up the difference. Office buildings are facing record vacancies, and apartment building owners are seeing rents begin to soften and even come down.

Commercial real estate owners have roughly $1.4 trillion in debt maturing over the next three years, according to Cushman & Wakefield.

“There are a lot of positive signs in today’s economic backdrop, but there are a few looming clouds on the horizon we can’t ignore,” says Devyn Bachman, senior vice president of research at John Burns Research and Consulting. “Commercial real estate is definitely something I have my eye on that could create some distress in the future.”

Cushman’s Rockey admits there are challenges ahead for these owners. But she doesn’t think that commercial real estate will be the cause of another downturn.

“There are going to be losses, [but] we do think it’s manageable,” says Rockey. “We don’t think it will be a recessionary trigger.”

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