There is no shortage of ominous economic signals right now. Bank failures, falling stock markets and news of high-profile tech company layoffs are unsettling, especially for those preparing to make what could be the biggest purchase of their lives. However, the ultra-low national unemployment rate is encouraging and the still-strong house prices suggest that the country is at least in an economic holding pattern.

So what happens if more of the key economic indicators start to move definitively south? What does this mean for a housing market that has already been hit by rising mortgage rates in the last year?

"We need to accept and understand that the economy today is very different from the economy of the last three years," says Ali Wolfe, chief economist at construction consultancy Zonda.

Without any other banks falling apart or problems in the economy, the country could avoid a recession or experience a mild one. However, if the other dominoes fall, all bets are off.

Most experts predict a period of continued change.

"The stock and housing markets will be volatile," says David Sacco, a professor of economics at the University of New Haven in Connecticut.

The Federal Reserve is intentionally trying to slow the US economy and the housing market by raising interest rates multiple times in a quest to curb runaway inflation. But if the Fed does not achieve its goal of a "soft landing" for the economy, the ensuing economic downturn could be unprecedented.

Home buyers have reluctantly returned to the market this spring as home prices have fallen in some parts of the country and mortgage rates have fallen slightly from last year's highs of over 7%. However, bank failures and a growing number of layoffs across all sectors could cause nervous buyers (and sellers) to take a back seat, bringing the housing market back into a freeze.

"The road to a soft landing has become even narrower due to recent banking conditions," says Keith Gumbinger, vice president of mortgage information site HSH.com." We don't know the ultimate impact; we don't even know if the whole thing has unfolded. It's definitely going to be something that people are concerned about."

And widespread concern does not generally translate into significant growth in the real estate business.

"Before committing to a 30-year mortgage, people want to have confidence that they will have a job and the income they need to meet their obligations," says Danielle Hale, chief economist at Realtor.com®." So far, the job market has been resilient, but headlines about bank failures must put a dent in that confidence. The question on the table is, how big is this dent?"

Will more and more layoffs scare off potential homebuyers?

The seemingly endless stream of companies announcing layoffs, including Disney, Amazon, Meta, Alphabet (Google), and most recently even the job board Indeed.com, could wreak havoc on the housing market. Those without stable jobs and those who fear for their job security are unlikely to buy a new home.

This unease could also worsen the housing shortage. As most sellers are also buyers, they may decide to stay put rather than upgrade or downgrade, or move elsewhere in the country as they ride out the economic storm. This could lead to fewer options for buyers, especially those looking for generally cheaper resale properties for the first time.

"Employment is driving demand for housing," says Zonda's Wolfe." So if you start to see more people losing their jobs, you should see a reduction in home sales. And you may see some people forced to sell."

Many of the layoffs have been concentrated in the technology sector, which most economists believe was over-employed during the pandemic.

"There are millions of jobs in the job market," says HSH.com's Gumbinger." While we did see some high-profile layoffs, we haven't seen the widespread job losses that are necessarily a precursor to a recession."

Even as unemployment rises - and many experts warn that layoffs are likely to become more common in the coming months - economists urge people not to panic.

"Remember," says Lawrence J. White, a professor of economics at New York University, "we're still at a near-historically low unemployment rate." This is not the level of more than 10 per cent we saw briefly in 2020, nor is it what we saw shortly after the 2008 financial crisis."

One potentially beneficial side effect of a recession: it usually leads to lower mortgage rates. The Fed typically tries to jumpstart the economy by lowering its own interest rates, which usually leads to mortgage rates following suit. This could make home ownership more affordable for potential buyers who still have jobs.

In addition, if there are fewer buyers competing in the market, then prices will fall.

Mark Zandi, chief economist at Moody's Analytics, previously told Realtor.com that in the event of a recession, he expects house prices to fall by 20 per cent from their peak last summer.

The exact amount will vary depending on the market. Currently, prices are already plummeting in the most popular pandemic-era markets, such as Austin, Texas, Las Vegas and Phoenix.

If prices and interest rates drop a little more, this could be all the incentive many homebuyers need to re-enter the market.

"It's possible to get worried when people hear news of economic uncertainty, but overall there's a lot of pent-up demand because people have been waiting for the market," says Lisa Sturtevant, chief economist at Bright MLS, a mid-Atlantic multiple listing service.

For many people, the idea of a recession is synonymous with the painful days of the late 2000s.

During the Great Recession, many Americans lost their homes to short sales and foreclosures, and vacant homes became a familiar sight in communities across the country. The influx of cheap housing forced home prices down further and left scores of homeowners owing more than their homes were worth.

However, real estate experts don't expect another foreclosure crisis this time around. When the last housing bubble burst, far more homes were sold than buyers snapped them up. This time the opposite is true, exacerbated by a national housing shortage.

Moreover, the mortgage system was not built on a house of cards. In the wake of the collapse, safeguards were put in place to ensure that only the most qualified borrowers received loans. The most problematic mortgages - the sub-prime loans - were largely eradicated.

So while some homeowners who lose their jobs may not be able to pay their mortgages and end up losing their homes, most homeowners will likely weather the recession.

The market "will be uncertain and chaotic," said Aaron Brown, an adjunct finance professor and Bloomberg columnist." [But] I don't think we're going to be as bad as we were in 2008."