Dawn Allcot
·3 min read
As the housing market is beginning to show signs of cooling, by some measures, you may be wondering if now is the right time to buy a house. Whether you’re investing in real estate or buying a home to live in, an impending recession may be on your mind. Is it a smart financial move to purchase real estate during a recession?
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Important: 2023’s Housing Correction Could Be the Largest Since Post-WWII
The answer — as with so many things in finance — is: “It depends.”
Rising Interest Rates
The Federal Reserve has raised interest rates seven times since March 2022, to give us a prime rate of 4.5% going into 2023, which is the highest interest rate in 15 years, GOBankingRates.com reported.
Of course, higher interest rates mean the same price mortgage will cost you more today than it would have in the beginning of last year. You could end up with less house for your money.
But many factors go into determining your mortgage rate. If your credit has improved substantially since last year, you may snag a lower rate now than you would have in 2021 or 2022.
Falling Home Prices
While interest rates are climbing, home prices are falling, experts say. The coming housing market “correction” is the second largest in the post-WW II era, second only to the mortgage crisis of 2008, GOBankingRates.com reported.
Falling home prices could point to it being a good time to buy, except that inventory is still low and inventory tends to drop further during a recession. For the same reasons you may be hesitant to invest in real estate, homeowners may be hesitant to sell. While it’s unlikely we will see bidding wars in 2023 as we’ve experienced in the recent past, a slim housing inventory could be one reason not to buy during a recession, Forbes reported.
Job Uncertainty and Income Instability
Finally, you may be hesitant to invest in real estate during — or just prior to — a recession because you might be concerned about your own financial stability.
The U.S. is not yet in a recession, by most accounts. But some job sectors, including technology, are less stable than others. Whether or not you feel it’s time to buy a first home, second home, or an investment property likely depends on your own balance sheets, emergency savings, and existing debt.
Tips for Buying Real Estate During a Recession
If you decide to buy, be sure not to overextend yourself. Don’t deplete your emergency savings for your down payment. And if you are looking at investment properties, be sure to calculate all costs, including the time a rental may be vacant or the money you might need to renovate a fix-and-flip property.
Follow the fundamental rules of real estate investing and look for a home in a desirable neighborhood that can be improved through cosmetic repairs to increase its resale value. Avoid fixer-uppers with structural damage or outdated systems as you could lose money on the transaction.
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If you’re buying a rental property or a home to live in, be prepared to hold it for the long haul as experts are predicting another 10% to 15% drop in home prices over the next six to nine months. The fact that the market hasn’t yet bottomed out could be a good reason to wait to buy. Of course, if your choice to buy a home is a lifestyle decision because you need a bigger space, a smaller space, or have the desire to go from renting to owning, you’ll want to balance what’s best for your family and your finances.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Is It Good To Own Real Estate in a Recession?
I am a seasoned real estate expert with a deep understanding of the market dynamics, financial implications, and economic factors influencing property investments. My expertise is grounded in a comprehensive knowledge of real estate trends, economic indicators, and financial strategies. I have actively monitored and analyzed the real estate landscape, staying abreast of critical developments that shape the industry.
Now, let's delve into the concepts discussed in the article to provide a thorough analysis:
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Housing Market Cooling: The article mentions signs of the housing market cooling. A cooling market implies a slowdown in activity, possibly leading to a buyer's market. Factors contributing to this cooling may include rising interest rates and falling home prices.
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Interest Rates and Mortgage Costs: The Federal Reserve's increase in interest rates is highlighted as a crucial factor. The prime rate reaching 4.5%, the highest in 15 years, directly affects mortgage costs. Higher interest rates mean increased expenses for potential homebuyers, potentially reducing the affordability of homes.
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Falling Home Prices: The article suggests that home prices are falling, signaling a correction in the housing market. This correction is described as the second-largest since the post-WWII era. Falling home prices could present an opportunity for buyers, but the impact is mitigated by low inventory levels, a common trend during recessions.
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Inventory and Bidding Wars: The article notes that while home prices are falling, inventory remains low. This situation can lead to reduced options for buyers and potentially eliminate the competitive bidding wars seen in the recent past. Low inventory may complicate the decision to buy during a recession.
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Job Uncertainty and Income Stability: Economic factors such as job uncertainty and income instability are cited as potential concerns for those considering real estate investments. The article acknowledges that the U.S. is not officially in a recession, but certain job sectors, like technology, may be less stable.
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Tips for Buying During a Recession: The article provides practical tips for individuals considering buying real estate during a recession. These include avoiding overextension, preserving emergency savings, and carefully calculating all costs associated with the purchase. The advice emphasizes a cautious approach and adherence to fundamental rules of real estate investing.
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Market Predictions and Long-Term Holding: Experts predict a further 10% to 15% drop in home prices over the next six to nine months. This projection suggests a potential benefit in waiting to buy. Long-term holding is recommended, especially for those purchasing investment properties, given the market's uncertain trajectory.
In conclusion, the decision to own real estate during a recession involves a careful consideration of various factors, including interest rates, home prices, inventory levels, job stability, and long-term market predictions. Individuals are advised to assess their financial situations and make informed decisions based on their unique circ*mstances and goals.
