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.
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.
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.
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
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 Are Less Likely to Lend Money
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 averagecommission 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!
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Do home prices go down in a recession?
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.
What is a house recession?
What does a recession do to real estate? In general, a recessiontypically causes real estate values to decrease becausethere is a lower demand for homes or investment properties.
Buying a home during a recession can sometimes be a good idea — but only for people who are lucky enough to remain financially stable. If you're thinking about buying during an economic downturn, be sure to enlist the help of an experienced local real estate agent.
There are several reasons to consider buying a home during recessions - the two main reasons are less competition and lower prices. There are also several potential drawbacks, like sky-high interest rates, a floor on pricing decreases and potential income changes if the U.S. does officially slide into a recession.
Buyers in a recession may struggle to purchase your home if mortgage rates remain high, and your home may not sell for as much as it could have gotten during the height of the seller's market.
Homebuyer.com data analysis indicates that, for first-time home buyers, June 2023 is a good time to buy a house relative to later in the year. This article provides an unbiased look at current mortgage rates, housing market conditions, and market sentiment.
Interest rates typically fall once the economy is in a recession, as the Fed attempts to spur growth. Refinancing debt and making more significant purchases are ways to take advantage of lower interest rates.
The median price for a U.S. home sold during the fourth quarter of 2008 fell to $180,100, down from $205,700 during the last quarter of 2007. Prices fell by a record 9.5% in 2008, to $197,100, compared to $217,900 in 2007. In comparison, median home prices dipped a mere 1.6% between 2006 and 2007.
Real estate values typically fall during a recession. Longer and deeper recessions will have the greater effect on home values. Selling today could help you from selling at a lower price in the future.
Buying a home during a recession can sometimes be a good idea — but only for people who are lucky enough to remain financially stable. If you're thinking about buying during an economic downturn, be sure to enlist the help of an experienced local real estate agent.
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.
Recessions over the last half a century have ranged from 18 months to just two months. Federal Reserve economists believe the next downturn may stick around for longer than usual.
Although home prices are expected to improve in the second half of the year, the California median home price is projected to decrease by 5.6 percent to $776,600 in 2023, down from the median price of $822,300 recorded in 2022.
With mortgage rates declining faster than expected, home prices are likely to remain mostly flat throughout 2024. This will be good news for buyers who have been waiting on the sidelines for a good time to enter the market.
Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.
Houses tend to get cheaper during a recession due to falling demand. People tend to be wary of making this big purchase during uncertain economic times, so prices fall to entice buyers.
“[W]ith the rate of inflation decelerating rates should gently decline over the course of 2023.” Fannie Mae. 30-year fixed rate mortgage will average 6.4% for Q2 2023, according to the May Housing Forecast. National Association of Realtors (NAR).
What typically happens is that the housing market can benefit during a recession. Monetary policy is loosened to stimulate the economy, leading to lower mortgage rates. This increases homebuying power, and homes become more affordable if people are willing to spend.
Citing the large disparity between property costs and buyer incomes, market expert Ian Shepherdson believes that home prices may fall another 15% in 2023. Shepherdson, the founder and chief U.S. economist of Pantheon Macroeconomics, predicted the eventual housing crash of 2008 in 2005.
It took 3.5 years for the recovery to begin after the recession began. A lot of buyers who bought in 2008, 2009 or 2010 saw their home prices decrease before the recovery started in 2011.
Homeowners were upside down—they owed more on their mortgages than their homes were worth—and could no longer just flip their way out of making the new, higher payments. Instead, they lost their homes to foreclosure and often filed for bankruptcy in the process.
The widely predicted U.S. recession remains out of sight as the first half of 2023 winds down, but the consumer sector that has fueled a remarkable recovery from the pandemic shutdowns may finally be showing signs of fraying.
Are we in a recession right now? The vast majority of top economists say no. Housing has been in the doldrums, with home prices starting to decline, because of high mortgage rates.
Preparing for a recession comes down to using strong economic times to your benefit. Focus on limiting your spending, forming a budget, building an emergency fund and eliminating high-interest debts.
As prices become unsustainable and interest rates rise, purchasers withdraw. Borrowers are discouraged from taking out loans when interest rates rise. On the other side, house construction will be affected as well; costs will rise, and the market supply of housing will shrink as a result.
When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses. When the market evens out down the road, rebalancing may be in order.
The answer really depends on your personal circ*mstances. “If you're concerned a recession is coming, it's generally better to sell now instead of waiting,” says Lee-Duffy. However, “selling during a recession might be beneficial if you're looking to downsize or rent.
“However, this downturn will be relatively mild and brief, and growth should rebound in 2024 as inflation ebbs further and the Fed begins to loosen monetary policy.”
Generally, the industries known to fare better during recessions are those that supply the population with essentials we cannot live without that. They include utilities, health care, consumer staples, and, in some pundits' opinions, maybe even technology.
In an article published in mid-April, the think tank said it expects a recession "starting in mid-2023" after increasing economic weakness, with the second quarter expected to be the first of three consecutive negative-growth quarters for GDP this year.
In my opinion, real estate is one intelligent option to consider in 2023, as it often has excellent returns, tax advantages and provides diversification even in the face of a challenging economic climate. Real estate also has the potential to compound your investment.
Chief Economist at First American Financial Corp, Mark Fleming, says an interest rate drop may not happen for several months. "Possibly in 2024, but it will depend on the Fed's decisions about raising rates in the second half of the year," says Fleming.
If you need to be occupying your home by a certain date to save on rent, it's a much better deal to close at the end of the previous month (for example, January 30) instead of the beginning of the current month (February 1).
A more conservative cohort predicts a more modest 10.3 percent growth in the same period. In addition, a mere 8 percent of poll participants expect the housing market to largely favor homebuyers in 2026.
Key Takeaways. The best age to buy is when you can comfortably afford the payments, tackle any unexpected repairs, and live in the home long enough to cover the costs of buying and selling a home. Legally, you must be at least 18 in most states to buy a home.
California is set to have the highest average home next decade, with a predicted price of $1,048,100 by September of 2030, if prices continue to grow at the current rate.
While it expects the Fed to continue increasing rates to tame inflation, it believes that long-term rates have already peaked. “We expect that 30-year mortgage rates will end 2023 at 5.2%,” the organization noted in its forecast commentary.
Is House Flipping Profitable in 2023? Yes! If you get the basics right, flipping homes in California is easier in 2023 than flipping homes in 2021's competitive market. You Make Money When You Buy Your Flip: Stick to the home flipper's 70% rule.
A recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.” Industries affected most include retail, restaurants, travel/tourism, leisure/hospitality, service purveyors, real estate, & manufacturing/warehouse.
In a recession, the rate of inflation tends to fall. This is because unemployment rises moderating wage inflation. Also with falling demand, firms respond by cutting prices. This fall in inflation can benefit those on fixed incomes or cash savings.
Some stock market sectors, like health care and consumer staples, generally perform better than others in a recession. Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification.
These organizations predict that mortgage rates will decline through the first quarter of 2024. Fannie Mae, Mortgage Bankers Association and National Association of Realtors expect mortgage rates to drop through the first quarter of 2024, by half a percentage point to about nine-tenths of a percentage point.
As of June 8, 2023, the 30-year fixed mortgage rate is 7.22%, the FHA 30-year fixed rate is 7.21%, the VA 30-year fixed rate is 7.09% and the jumbo 30-year fixed rate is 6.40%.
Fannie Mae expects the 30-year fixed to ease to around 6.1% in the second quarter of 2023, before falling to 5.9% in the third quarter and 5.7% in Q4. And it gets even better than that. By the end of 2024, they expect the 30-year fixed to average 5.2%.
So far in 2023, the Fed raised rates 0.25 percentage points twice. If they hike rates at the May meeting, it is likely to be another 0.25% jump, meaning interest rates will have increased by 0.75% in 2023, up to 5.25%.
After falling in 2023 and 2024, home prices are predicted to plateau in 2025 before rising again at just above the rate of inflation. However, due to the spike in home values from 2020 through 2022 due to record-low mortgage rates, median sales prices will take at least until 2027 to regain the highs of mid-2022.
The median home price will rise to $385,800, an increase of only 0.3% from this year's level ($384,500), while home sales will fall 6.8% compared to 2022's level (5.13 million).
The Mortgage Bankers Association predicts rates will fall to 5.5 percent by the end of 2023 as the economy weakens. The group revised its forecast upward a bit — it previously expected rates to fall to 5.3 percent.
ING predicts rates to range from 5% in the second quarter of 2023, rising to 5.5% in the third quarter, and then falling back to 5% in the final quarter of the year. They also predict interest rates ranging between 3% and 4.25% in 2024, staying at 3% by the end of 2025.
A more conservative cohort predicts a more modest 10.3 percent growth in the same period. In addition, a mere 8 percent of poll participants expect the housing market to largely favor homebuyers in 2026.
Strained affordability has seen many homebuilders turn to smaller units. The Pandemic Housing Boom, which pushed national home prices up over 40%, coupled with last year's mortgage rate shock, has resulted in a deterioration of housing affordability.
The Average US Home Could be Worth $382,000 by 2030
House prices in the US have risen by 48.55% in the last ten years (from $173k to $257k) and if they continue to grow at this rate for another decade, the average US home will be worth $382k by 2030.
While it expects the Fed to continue increasing rates to tame inflation, it believes that long-term rates have already peaked. “We expect that 30-year mortgage rates will end 2023 at 5.2%,” the organization noted in its forecast commentary.
30-Year Mortgage Rate forecast for September 2026. Maximum interest rate 3.33%, minimum 3.13%. The average for the month 3.25%. The 30-Year Mortgage Rate forecast at the end of the month 3.23%.
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