We may not currently be in a recession, but we are experiencing some atypical circ*mstances in our economy, especially the housing market.
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.
When we talk about personal finance, we often like to think in blanket rules. We like these mental shortcuts and standardized answers because they present seemingly simple solutions.
But in reality, a rule of thumb can be wrong a large percentage of the time. For example, you can’t answer the question, ‘Should you buy a house during a recession?’ with a clearcut yes or no. So much of the answer is highly variable depending on your location, job security and what happens in the near future, which is something no one can accurately predict.
That said, there are some helpful ways to think about whether buying a home during a recession is right for you, given your unique circ*mstances.
Are we in a recession?
As of yet, the National Bureau of Economic Research (NBER) has not announced a recession, though they typically wait until long after the fact to declare the start and end dates of such economic events.
We do know that the NBER looks at the following factors in concert to determine if the economy is in a bad enough spot to officially declare a recession:
While GDP was down in Q1 and Q2 of 2022, it went back up during Q3 2022. Unemployment numbers are officially back down to pre-pandemic levels, sitting at 3.7% as of November 2022. November’s retail sales numbers revealed a 0.6% month-over-month decrease, but they were up 6.5% year over year. While the Industrial Production Index has stalled since April 2022, it hasn’t taken a nosedive.
None of the numbers look all that bad, but since inflation is high and we’re still dealing with strange economic circ*mstances brought on by the pandemic and geopolitical conflict, a lot of people still feel like there’s something off with the economy - so much so that we’re pulling out all variety of recessionary monikers like ‘white collar recession,’ ‘Patagonia vest recession,’ and now, ‘Richcession.’
Some of the pros of buying a house during the coming months, whether we get the recession label or not, include:
Potential decrease in home prices.
Lower likelihood of getting into a bidding war.
Ability to refinance in the future with lower interest rates.
Home prices may decrease
The housing market was in an unsustainable rally between December 2019 and June 2022, with home prices rising by 45%. Such a huge increase in prices over such a short period was unprecedented.
Whether or not we’re in a recession currently, we have started to see home prices decrease. The 2.67% drop in home values nationally between July and October 2022 was one of the largest corrections since WWII. Some markets (notably those in large cities in the West that lost residents to remote work) have seen price drops as large as 5.4%.
These cities aren’t the only places where declines are expected, though. There may be even larger declines in so-called ‘bubble boomtowns.’ When tech workers relocated, these are the locales where they settled.
Places like Morristown, Tennessee; Muskegon, Michigan; and Pocatello, Idaho are all projected to experience price drops of more than 20% over the next year if a full-blown recession does indeed manifest, according to Moody’s.
Not all markets will experience losses, but if you’re house hunting in an area that does, buying over the next year could mean a lower sticker price.
You’re less likely to get into a bidding war
Madness ensued during the pandemic housing craze. Not only were buyers getting into outrageous bidding wars, but they were also forgoing smart buying practices, like demanding an inspection before purchase.
Luckily for buyers, these bidding wars have cooled. That doesn’t just mean that you’re less likely to pay above-market prices for a home. It also means you can make informed decisions, relying on inspections to alert you of any potential issues with the property before you purchase.
You can refinance in the future
Rates right now are fairly high. While the national average on a 30-year, fixed-rate mortgage has fallen back below 7% (it’s 6.47% as of Dec. 30, 2022) this number is still far higher than the mortgage interest rates we saw at the beginning of 2022, prior to the Fed’s rate hikes that started in March.
However, we can expect these rates to go back down if the Fed is successful in using them to lower inflation. The Fed has indicated that it intends to raise rates throughout 2023, but after this, there may be the potential to refinance at lower rates.
Cons of buying a house during a recession
There are some potential cons of purchasing a home at the current moment, too. They include:
High current mortgage interest rates
A floor on price decreases
Inventory is slim currently and during recessions generally
Lack of job/income security, especially if you work in the tech sector
A recession doesn’t automatically mean lower interest rates
If we’re in a recession right now, we’re experiencing one where rates are higher than they were previously. Rising interest rates are a major contributor to the cooling of the housing market. Because inflation is still so high, we’re not seeing the lower interest rates that typically come alongside a traditional recession.
The housing market currently has a floor
Home prices are anticipated to decrease over the next year, but there is a floor. Most economists are not predicting a 2008-style crash. A large reason for this is that there’s simply not enough affordable inventory. The issue isn’t that Americans don’t want to buy homes. The issue is that they cannot afford to do so.
That means once prices come down far enough, there will still be demand. While this is good news for current homeowners, it limits how good of a deal you’ll be able to find as a prospective buyer. It’s unlikely that you’ll find inventory at pre-pandemic prices, even with the current downward trend in pricing.
Inventory may be slimmer during a recession
During a recession, current homeowners are less likely to list. They’re watching these housing trends just as much as buyers, and many may wait to put their home on the market until there are more favorable conditions.
We’ve already seen this scenario start to play out over the past several months.
Your income situation is more likely to change during a recession
One of the key indicators of a recession is unemployment numbers. During a recession, you’re more likely to lose your job, which would make it more difficult to keep up on a mortgage. You might not want to lock yourself into a 30-year financial commitment under such circ*mstances.
Right now, we’re just not seeing unemployment numbers that would indicate a recession. In the jobs market as a whole, there are 1.7 jobs open for every unemployed individual.
But if you work in certain sectors, like tech, you’re more likely to be worried about holding onto your job. While this sector only makes up 2% of the American job market, if you work for a tech-based company, you have more of a reason to worry about your job security in the near future.
The fact that this sector is experiencing mass layoffs could further compound the disproportionate slide in pricing we see in Silicon Valley and bubble boomtowns.
The bottom line
If we’re in a recession, it’s an odd one. The traditional rules don’t seem to apply to the current, unique market circ*mstances.
Whether or not it’s a good time to buy a home is going to be highly variable, depending on which market you’re shopping, your willingness to sign on to higher rates in the hopes of refinancing in the future, and your short-term employment outlook.
While most Americans hold the vast majority of their wealth in home equity, home ownership isn’t the only way to secure your family’s financial future. You can also invest in the stock market using one of Q.ai’s Investment Kits powered by artificial intelligence, and hedging against these strange economic circ*mstances with Portfolio Protection. This is also a way to keep your savings for a down payment working while you search for the right deal - this also keeps your money liquid so you can move quickly when the time comes.
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.
Another factor to consider when asking is real estate agent a recession-proof career is how the market prices of homes can impact your take-home pay. While you still might bring in the same number of clients during a recession, your average earnings per house sold might start to drop.
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.
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.
In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.
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.
To create income from real estate during a recession, you need to be diversified with the types of real estate investing you're involved in, such as REITs, buy & hold, fix & flips, mobile home parks, multifamily, and others.
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
What Happens to Rents in a Recession? Rents can go both up and down in a recession. The location of a rental property and how hard the local economy is hit by a recession will dictate whether rents go up, down or stay the same.
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.
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.
Before a recession hits, home prices are typically at an all-time high. This means that selling your home before a recession will result in a higher profit between the purchase price of the real estate and the sale price, which can increase your capital gains taxes.
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.
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.
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.
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.
If you're trying to make use of lower prices, you'll likely benefit most if you buy before the recession starts or during its early phase. Also, stocks that pay cash dividends can provide income, which can help offset some market losses in your portfolio. Bonds: Prices for bonds tend to rise during a recession.
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.
Looking at recessions in this country going all the way back to 1980, the graph below shows each time the economy slowed down mortgage rates decreased.
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.
Just because there's a recession doesn't necessarily mean rent prices go down. In fact, during the 2008 recession, it was the exact opposite. In the current rental market, we have seen the rate of increase in rental prices come down, but this only translates to lower rent prices if you're in select markets.
Pre-packaged food items, like chips and cookies, offer shelf-stable options to help ensure your stock doesn't go bad as you're building consumer awareness of your expanded offerings. Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand.
Generally speaking, most experts recommend having at least three to six months' worth of living expenses saved up and easily accessible in case of emergency. This ensures that if there is a sudden loss of income, you will have enough cash on hand to cover your basic needs until you can find a job.
For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.
As such, investing during a recession can be a good idea but only under the following circ*mstances:You have plenty of emergency savings. You should always aim to have enough money in the bank to cover three to six months' of living expenses, with the latter end of that range being more ideal.
The stock price for countercyclical stocks generally moves in the opposite direction of the prevailing economic trend. During a recession, these stocks increase in value. During an expansion, they decrease.
What are some examples of businesses that thrive in recession? Due to the elasticity of demand, recession-proof industries are usually in essential services, like health care, senior services, grocery stores, and maintenance, such as plumbing and electrical.
The rental market does well during a recession and when home prices are high because most people cannot afford to purchase homes in either scenario. So you really have nothing to worry about as a rental property owner. Whether economic times are good or bad, you should be safe in your rental property investment.
A new house had a price tag of $3,900, which sounds attainable given that the average income was $1,731 per year. A new set of wheels would set you back $860, a movie ticket was just 25c, gas was 10c per gallon and a postage stamp was 3c.
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.
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.
In a deflationary recession, prices fall while the economy contracts. Various factors, such as a decrease in the money supply or an increase in production, can cause this. A deflationary recession can be challenging to manage because it can lead to lower interest rates and higher unemployment.
While the prices of individual items may behave unpredictably due to unexpected economic factors, it is true that a recession might cause the prices of some items to fall. Because a recession means people usually have less disposable income, the demand for many items decreases, causing them to get cheaper.
“[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).
Along those lines, organizations like Fannie Mae and the Mortgage Bankers Association forecast that the average rate on 30-year fixed-rate mortgages will decline throughout 2023, continuing into the first quarter of 2024.
What happens to my mortgage if the housing market crashes? A housing market crash won't affect your existing fixed-rate mortgage. However, if the value of your home drops below your purchase price, then you'll be making payments that are greater than the worth of your property.
Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.
“Growth stocks, especially profitless companies that are tied to high growth prospects, do worse during recessions,” Nakadi says. Instead, consider more income-producing investments and dividend-paying stocks.
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
Consumer staples, including toothpaste, soap, and shampoo, enjoy a steady demand for their products during recessions and other emergencies, such as pandemics. Discount stores often do incredibly well during recessions because their staple products are cheaper.
Higher interest rates that often coincide with the early stages of a recession provide an advantage to savers, while lower interest rates moving out of a recession can benefit homebuyers. Investors may be able to find bargains on assets that have decreased in price during a recession.
Many economists believe the strategy will trigger a recession this year. But the NABE forecasters expect the economy to grow 0.8% in 2023 – based on the change in average GDP over the four quarters compared with 2022. That is down from 2.1% last year but up from their 0.5% estimate in December.
Introduction: My name is Aracelis Kilback, I am a nice, gentle, agreeable, joyous, attractive, combative, gifted person who loves writing and wants to share my knowledge and understanding with you.
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