Will housing be cheaper if the market crashes?

Home values tend to fall during a recession. So, if you're searching for a home, you're likely to find: Homeowners who are willing to lower their asking prices. Homeowners doing short sales to get out from under their mortgages.

upnest.com - Buying a House During a Recession: Good Idea or Bad Idea? - UpNest

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Thinking About Buying a House During a Recession?

Just hearing the word “recession” is enough to make potential homebuyers — and almost everyone else — shudder. After all, the most recent recession, in 2008, was devastating to the real estate industry. Sales plummeted, homes went into foreclosure, and the market in general spun into chaos. But buying a home during a recession can lead to a great deal if you’re savy enough! The 2008 recession and housing market crash showed how closely the economy is tied to home prices.

While most consumers are worried about how long each surge and recession will last and how bad it will get, if you were thinking of buying a home you might have another concern. Should I risk trying to buy during a recession?

We’ll tell you everything you need to know about how recessions affect the real estate industry and whether you should be buying a house during a recession.

What is a recession?

The classic definition of a recession is consecutive quarters of negative growth. Typically, the National Bureau of Economic Research (NBER) waits for the second quarter of statistics before declaring a recession. When COVID-19 was just beginning, and there was already every indication that the economy would continue to collapse an unprecedented number of unemployment claims and corporate bankruptcies were looming on the horizon. At that point, a recession was all but guaranteed. A new recession and housing market fluctuations seemed a likely aspect of pandemic disruptions. To help understand what might drive the next housing market crash, lets take a look at the most recent recessions.

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The 2008 Recession

The most recent recession prior to this one was the Great Recession of 2008, which actually lasted from 2007 to 2009. And the real estate industry was at the heart of that recession, due to subprime mortgage rates. To sum it up, lenders were offering subprime mortgages — mortgages given to borrowers with low credit scores and who are deemed higher risk. That led to a soaring demand for homes, which made prices skyrocket. When these borrowers were eventually unable to continue payments, the demand for homes plummeted, which also meant a significant price drop and a drop in equity for all homeowners (not just those with a subprime loan). On top of that, the financial institutions holding those mortgages were suddenly unable to collect, leading them to file for bankruptcy. Since then regulations and internal policies have been adopted to prevent over usage of subprime mortgages, meaning for people with lower credit it’s harder to get a loan.

The 2020 Recession

Luckily, if you are thinking of buying a house during a recession, the 2020 Recession seems to be much different. For one, it wasn’t caused by the financial sector. This recession was caused by a pandemic, and there’s reason to believe that once the pandemic is under control, the economy will begin to recover. A more temporary decline in economic activity should in theory be less dire than the 2008 recession. Also, the 2020 Recession isn’t correlated to the housing market. Although any recession will affect the housing market in some way, this time around it hasn’t caused it to collapse like with the massive defaults on subprime mortgages. In 2021 we saw home prices surge up 20% compared to 2020, despite the strain of the pandemic on many people’s wallet. Increased demand, also attributed to the pandemic, and a lower supply of homes led to drastic upticks in costs to home buyers.

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2022 is projected to have similar affordability issues and UpNest’s experts say you can expect to see bidding wars this year if you look to buy. However, any recession will affect the housing market, since many buyers don’t want to make such a huge financial commitment when the economy is on shaky grounds.

COVID and the Housing Market

And COVID itself had had an impact on real estate transactions. With stay-at-home mandates in place, you probably weren’t able to go look at homes. And even if you were able, you might not have wanted to — and sellers might not have wanted you in their home. So less homes are currently on the market. For buyers who did find a home, the closing process was lengthier than usual, with statewide shutdowns affecting other aspects of real estate transactions: appraisals, home inspections, and even movers. And unfortunately for potential buyers, because of the limited inventory, home prices have stayed at pre-COVID levels or even higher.

Is it a good time to buy a house?

Historically, even experts have done a bad job predicting the next housing market crash. Prices increased dramatically for much of 2020 and 2021, but the Fed appears to be ready to raise interest rates, which could change the calculations for buyers and depress home prices. Rising interest rates mean you should try to save money where you can, UpNest helping you save on agent commissions is the perfect opportunity to save on upfront costs of buying a home.

Is Buying A Home During A Recession Worth It?

In general, buying a home during a recession will get you a better deal. The number of foreclosures or owners who have to sell to stay afloat increases, typically leading to more homes available on the market and lower home prices. However, because this recession is unlike any other, every buyer will be in a unique position for a major financial situation. If you work in hospitality, for example, your current financial situation is drastically different than someone who was able to shift into working from home seamlessly. Only you can know whether buying a house during a recession is achievable for your family, but here are some factors to consider.

Pros of Buying a Home During a Recession

If you are looking at homes during a recession, there are some definite benefits you should consider.

Lower Prices

During a recession, there are usually less buyers, so houses stay on the market longer. This makes sellers more likely to lower their listing prices, so that their home is easier to sell. You might even get lucky with a home at an auction.

Lower Mortgage Rates

The Federal Reserve generally lowers the interest rate during a recession, to stimulate the economy. This results in banks lowering their rates, too, including the mortgage rate. With a lower mortgage rate, you will end up paying less for your home over the years. Depending on how low the rate goes, it could be a significant savings.

Seller Concessions

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As their houses sit on the market longer, sellers start getting nervous. You can ask for concessions such as asking the seller to pay for closing costs.

Cons of Buying a House During a Recession

However, there are some things to consider before you decide to buy a home in the middle of a recession.

Job Uncertainty

This is the big one to keep in mind. With unemployment rates shooting up during a typical recession, many jobs are in danger of cutbacks or elimination. Even if you think your industry or position is secure, things can change quickly. And remember, a mortgage is just one of the costs of homeownership. You don’t want to find yourself in a foreclosure situation, so make sure you are secure in your job, first and foremost. Banks understand how the economic uncertainty can affect anyone’s job. So, they are less likely to approve mortgages, out of fear that they will have to foreclose on a home — a lengthy legal process.

Title Issues

If the current owners of the home you want to buy went deep into debt, or even into foreclosure, there may be title issues that affect your home purchase. Make sure your title company’s search is especially thorough.

Difficulty Selling Your Home

If you need to sell an existing home before you can buy a new one, this might be a problem during a recession. Depending on your local market, you might get less money than you would have expected or your home might sit on the market for longer before selling.

Competition

Although there might not be as many home buyers during a recession, you might find yourself competing for a home with investment companies. These companies know that prices are lower during a recession, and they are there to make a profit. You will have to take an honest look at your current financial situation and weigh the pros and cons carefully before buying a house during a recession. However, if you are certain about your finances and your financial future, you could end up getting your dream home at a more affordable price than you could have imagined!

Get The Best Deal When Buying a Home During a Recession

During a recession, working with a Realtor who understands the local market is more important than ever. UpNest can connect you with the top Realtors in your area, with competitive pricing that will save you money and get you into your new home. Our network agents have been carefully vetted and often offer competitive, lower than average commission rates to UpNest customers. There is no obligation to sign up with one of our network Realtors, but when you can potentially save thousands on commission – why wouldn’t you? If you’re ready to get started, just enter your zipcode below!

Agents Compete, You Win.

upnest.com - Buying a House During a Recession: Good Idea or Bad Idea? - UpNest

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