Smart Real Estate Strategies for a Volatile Housing Market

The Contradiction of Building During a Downturn

Starting a development project during a recession may seem counterintuitive. Economic downturns often bring higher borrowing costs, cautious consumer behavior, and tighter credit access. These factors can create hesitation among builders and investors.

However, past cycles show that downturns can be a productive time to plan. During the Great Recession (2007–2009), U.S. housing starts declined from more than 2 million units in 2005 to just 554,000 in 2009—a 73% drop (St. Louis Fed).

Developments take time. Entitlements, permits, and construction typically span 12 to 24 months. Projects initiated during a recession often complete as the market begins to recover, giving developers a first-mover advantage.

The Long Game: Why Timing the Recovery Starts During the Recession

Real estate cycles are long, and smart investors plan accordingly. From site acquisition to final construction, most projects take one to two years to complete.

Those who secured land and permits during the 2010–2011 slowdown were well-positioned when the recovery took hold in 2013 and beyond. Waiting until the market appears healthy can lead to missed opportunities, since competition and costs tend to increase on the upswing.

Investing with a long-term mindset allows developers to take advantage of favorable conditions when others are hesitant to act.

Cost Advantages of Building in a Down Market

When economic conditions slow, developers often gain leverage. Several factors create this advantage:

• Land prices often decline, especially for underutilized or distressed parcels

• Labor availability increases as speculative activity drops

• Material costs may stabilize or fall, depending on global demand

• Permitting timelines may improve due to reduced application volume

These cost dynamics create windows of opportunity for well-prepared builders and investors.

Why Zoning Matters More Than Ever in a Recession

Zoning dictates what can be built, where, and at what scale. When home values stop rising quickly, understanding land use regulations becomes a key differentiator.

Zoning determines:

• Allowed property uses (e.g., ADUs, duplexes, multifamily)

• Development scale (e.g., floor area ratio, density, setbacks)

• Constraints (e.g., fire zones, slope, overlays)

Zoning changes are not uncommon during downturns, especially in jurisdictions seeking to stimulate housing development. According to McCoy Valuation, expanded development rights such as upzoning can significantly increase a property's underlying value.

Understanding zoning allows investors to find opportunities others miss.

Resilient Development Strategies During Economic Downturns

Not all projects are impacted equally by a volatile market. Some development types are more adaptable and financially resilient in periods of uncertainty.

Accessory Dwelling Units (ADUs)

ADUs secondary residential units built on existing lots—offer affordable expansion opportunities. These structures generate rental income and add long-term property value. The Terner Center for Housing Innovation notes that ADUs are particularly beneficial in high-cost regions where infill housing is needed.

Small-Lot Subdivisions

This approach involves subdividing a single lot into smaller parcels for multiple units, such as townhomes. According to Thesis Driven, this strategy increases density in urban areas and meets the growing demand for entry-level housing in land-constrained cities.

Conversions of Underutilized Properties

Older single-family homes or oversized structures can often be converted into multi-unit rentals or live-work spaces. The Regional Plan Association has identified this approach as a cost-efficient way to create more housing within existing neighborhoods.

Teardown and Rebuild in Upzoned Areas

Where zoning has shifted to allow higher density, demolition and rebuilds may offer a better return than renovations. The National Association of Home Builders emphasizes that zoning flexibility is essential for unlocking new infill opportunities.

Smart Investment Strategies During a Recession

While development opportunities can be compelling, investment strategy also plays a crucial role during downturns. Here are several tested approaches:

Focus on Income-Producing Properties

Rental properties provide consistent cash flow. As homeownership rates often dip during recessions, rental demand can remain stable or even increase. Income-producing assets offer long-term sustainability in uncertain markets.

Diversify Across Property Types and Markets

Owning a mix of residential, commercial, and mixed-use properties across different geographic regions helps mitigate localized risks. Diversification remains a core principle in protecting capital during economic slowdowns (CRE Loans).

Maintain Adequate Cash Reserves

Liquidity gives investors flexibility to act quickly on distressed assets or underpriced opportunities. Strong cash flow also reduces reliance on costly financing during periods of high interest rates or tightening credit availability.

Final Takeaway: Build Smart, Not Fast

Economic downturns narrow the playing field. But they also give thoughtful investors a chance to move with less competition and more leverage.

The advantage doesn’t lie in speed it lies in clarity. Investors who understand development timelines, zoning restrictions, and local regulations can move decisively and position themselves ahead of the market's return.

Markets will rebound. But those who succeed next cycle are already planning today.