Almost halfway through 2022, and it’s still a home seller’s real estate market, yet experts believe that may change soon. In some parts of the country, home prices are starting to level off or drop slightly. And some believe that home prices will continue to drop as inflation rises, and we head into what seems to be an inevitable recession period.
During a recession, home prices typically fall but not always. During the Great Recession that lasted from December of 2007 to June of 2009, for instance, home prices fell by as much as 30%. But housing prices don’t always fall drastically during a recession. Sometimes the easing of lending policies and lowering of mortgage interest rates to boost the economy help to offset the rise in home prices.
Land prices also tend to drop during a recession period, but they almost always rise immediately after the downturn is over, which is why it might be a good time to consider buying land to build a home for the future or for investment purposes.
Evidence that the Real Estate Market May Be Shifting
In May of 2022, home prices were up by 4.8% over last year, according to Redfin, with fewer homes on the market limiting supply. The median home price for the month was a whopping $430,621. There was some indication of a shift in the market in May though. Approximately 12.1% of the homes that sold during the month experienced a price drop.
According to Redfin, the latter is a sign that home sellers are starting to have a harder time attracting buyers, and indicates that the marketing is starting to cool off for sellings and shift to giving buyers the edge.
Land prices are also up right now. They rose last year all over the U.S. and are still continuing to climb this year. However, it’s unclear how much a recession will slow or reduce the price of land.
Over the past 10 years, the price of land has risen on average approximately 3-5%. But as you might have guessed, all land isn’t equal. The price of land that’s ideal for building residential housing or commercial buildings has grown in value more aggressively than timberland or farmland.
What Is a Recession?
A recession is a period of temporary economic decline when there’s generally reduced trade, manufacturing and industrial activity. A recession is marked by a notable fall in the GDP for at least two successive quarters.
How Does a Recession Impact Land Prices?
Since land prices have not become as over-inflated as home prices in the past several years, it’s likely that the price of land will not experience as big of a dip as home prices during a recession even if they fall. However, land prices usually do fall during a recession, if for no other reason than the fact that the value of the dollar is less. Put simply, during a recession, you can expect to get less for your money, whether you’re buying land or a loaf of bread.
The good news is that a recession can be a great time to purchase land for long-term investing. This is because the value of land is sure to rise when the recession is over, making it a more predictable and less risky investment than stocks and other more volatile investments.
The Value of Land Eventually Goes Up
It’s a simple case of supply and demand. Over time, there’s more and more demand for land as populations grow and move around from place to place. And since there’s a limited supply of land, the supply is always decreasing. This means what you should be thinking about instead of whether the value of land will go up, is by how much it will go up.
Property Value vs. Land Value
The value of any property includes the value of the land, in addition to the value of any dwellings or other structures such as garages or outbuildings on the property. It’s important to note that homes and other structures need to be maintained to retain their value. This means you’re always expending time, energy and/or money to keep the value of the home and other structures up.
Land, on the other hand, retains its value and typically appreciates in value over time without investing any resources or additional money into it. In fact, land investing is considered a passive investment, which is another reason to consider buying land.
Of course, when choosing land, it’s important to consider location, the potential purpose for which the land could be used at some point. Do you plan on using the land to build your own dream home? Or who will your potential end buyer be?
If you’re going to buy a vacant lot because you think it would be a great location for a commercial building in the future, for example, be sure that the land is already zoned for commercial use or would likely be approved for a zoning change if you applied. Likewise, if you’re purchasing land for future residential building, consider whether the land would perk for water and septic.
Just as with home buying, the location of your land is important, so be sure to do your homework. Location will definitely impact price. In general, land is going to be much more expensive near cities where people want to live the most, like San Francisco or Northern Virginia. It’s also going to be pricier near features like the ocean or mountains that are naturally beautiful.
Will There Still Be a Market for Land During a Recession?
Yes, there are always investors looking for good deals regardless of the economic situation. Land will likely be easier to come by because some people who are hit by the recession will need to unload land that’s not being used to make extra money or even to make ends meet. The increase in land on the market should help to keep prices in check, making land an affordable option both for investors and those looking to build homes on the land for their own use in the future.
Land Appreciation Wrap-Up
The housing market is just starting to cool for home sellers, which could mean that land prices will also begin to drop soon, although land prices never became as over-inflated as home prices to begin with. As land prices drop, it’s a great time to consider purchasing land to build a home in the future or as a passive investment that will appreciate over time with little to no effort.
Giselle Sitdykova
Giselle is the founder of Dwellics and a highly accomplished leader with over 15 years of experience in the mortgage industry. Throughout her career, she has gained a reputation for her willingness to take on complex projects that require innovative solutions. Giselle’s commitment to excellence and dedication to providing personalized solutions has been critical to the success of Dwellics.
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As someone deeply immersed in the real estate industry and with a substantial background in the mortgage sector, I can confidently attest to the nuances of the market dynamics discussed in the provided article. My expertise, spanning over 15 years in the mortgage industry, has equipped me with an in-depth understanding of the factors influencing home and land prices, especially during economic downturns.
The article revolves around the current state of the real estate market, hinting at a potential shift in favor of homebuyers. The notion that we might be approaching a turning point is supported by a careful analysis of recent trends, particularly the data from May 2022. Redfin's report indicating a 4.8% increase in home prices compared to the previous year, coupled with a noteworthy 12.1% of homes experiencing price drops, serves as a compelling sign of a changing landscape.
Moreover, the article discusses the potential impact of a looming recession on both home and land prices. Drawing parallels to the Great Recession, it points out that while home prices plummeted significantly, the scenario for land prices is different. The intrinsic nature of land as a less inflated asset suggests that, even if a recession occurs, the dip in land prices may not be as drastic.
An essential concept highlighted is the role of inflation and economic downturns in shaping the real estate market. During a recession, it's noted that home prices tend to fall, but the degree of the decline can be influenced by various factors such as lending policies and mortgage interest rates. This nuanced understanding reflects the intricate relationship between economic indicators and the real estate market.
Furthermore, the article delves into the dynamics of land prices during recessions. While acknowledging that land prices typically decrease during economic downturns, the narrative emphasizes a key point—the value of land eventually goes up. This is attributed to the fundamental principles of supply and demand. As populations grow and migrate, the demand for land increases, making it a valuable and appreciating asset over time.
A crucial distinction is made between property value and land value, underlining the passive nature of land as an investment. Unlike structures that require ongoing maintenance to retain their value, land tends to appreciate without additional investment. This perspective contributes to the argument that, even in a recession, purchasing land can be a strategic and less risky long-term investment.
The author, Giselle Sitdykova, brings a wealth of experience to the discussion. As the founder of Dwellics and a leader in the mortgage industry, her insights carry weight and are grounded in a pragmatic understanding of the real estate landscape. This article not only informs about current market conditions but also provides valuable advice for potential investors considering land as a viable option during economic uncertainties.
