In 2022, as inflation grew and gross domestic product declined, many feared that the country was headed toward a recession. In response to these conditions, the Federal Reserve has been raising interest rates dramatically. While this is primarily to combat inflation, it affects other segments of the economy as well, including the housing market.
Interest rates are not directly tied to mortgage rates, but typically, as the one increases, so does the other. The result of pricier mortgages is a slowing housing market, with fewer buyers.
The rapid cooling we’re seeing in the housing market is a harbinger of what is to come for the broader economy.
— Greg McBride, CFA, Bankrate chief financial analyst
If you’re hoping to buy a home, are these conditions beneficial, or do they create even more challenges? Here’s everything you need to know about buying a house during a recession.
What is a recession?
There has been considerable debate over the definition of the term recently. By one very simple definition, a recession is when an economy experiences two consecutive quarters of negative growth — meaning gross domestic product shrinks for two quarters in a row. That did, in fact, happen in 2022. But most experts argue that a true recession requires more than just one indicator.
Other factors, including the rate of unemployment, income, consumer spending, retail sales and industrial production all factor into determining whether or not there is a recession. The official determination is made by the National Bureau of Economic Research’s Business Cycle Dating Committee. That group takes into account many different factors, including revised GDP data that becomes available months after the initial data is released, to make an official determination.
Are we in a recession now?
While the country did experience two straight quarters of negative economic growth in Q1 and Q2 of 2022, we saw GDP growth in Q3 and Q4, and that metric is just an unofficial rule of thumb anyway. The better question might be not whether we are in a recession now, but whether one is looming. Bankrate’s most recent Economic Indicator survey shows that the nation has a 64 percent chance of entering a recession this year. However, as of March 2023, the National Bureau of Economic Research has not declared one.
Recessions and the housing market
Economic recessions — and the response to them by the Federal Reserve — can affect the housing market in a number of ways.
Key takeaways
- Mortgage rates typically drop during a traditional recession.
- Home prices can drop as well, with fewer qualified buyers and less competition for homes.
- However, there are still plenty of risks during any economic downturn, and today's climate is not exactly traditional. Recession buyers will need a high credit score, strong finances and stable income.
During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.
But the current market has been seeing interest rates rise instead of fall, thanks to the Fed’s ongoing efforts to slow inflation. Rising rates typically increase the cost of getting a mortgage to purchase a house. This, in turn, lowers the demand for homes in the market.
The buyers who remain in the market during times of uncertainty like this often change — or at least change what they are looking for. They may find themselves in the market for a different type of home than they would be otherwise.
“There is a direct correlation between how much home a borrower can afford and the prevailing rates,” says H. Jack Miller, president of Gelt Financial and strategic financing advisor at Real Estate Bees. “Most people are buying as much home as they can afford.”
Will house prices go down in a recession?
While the cost of financing a home typically increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.
Decreased demand and fewer buyers mean that fewer people are competing for the same inventory of homes. When that competition dries up, sellers lose the upper hand they enjoy in a roaring seller’s market like we’ve seen in recent years. They will likely have to settle for less than their initial asking price — or at least less than they might have gotten in a more competitive market. And while that’s bad news for sellers, it can be good news for hopeful homebuyers.
Should you buy a house during a recession?
Recessions can often push buyers out of the market, but that’s not necessarily because it is a bad time to buy. In fact, if you can afford to, Miller argues a recession can be a good time to buy a home. “Some people hold off on buying when this happens, but I think this is a mistake,” he says. “When rates go up and demand slows, buyers can usually get a better deal on the home they want.” You can always refinance when rates go back down again.
Whether the country is in an official recession or not, McBride says the conditions could still be right in the coming months for homebuyers to act. “Between lower mortgage rates and what I expect to be a leveling out of home prices, prospective buyers may get a little more bang for the buck in the next six to 12 months than what they saw for most of 2022,” he says.
With all of that in mind, let’s look at some of the major upsides and disadvantages to buying during a recession.
Pros
- Less competition: A recession often puts people in a difficult financial position, leaving them unable to afford a new home. This results in less competition within the market for those who can still afford it.
- Lower prices: With fewer buyers, home sellers will likely no longer see multiple offers or bidding wars for their properties. This can lead to lower home prices.
- Lower rates: During a recession, the Federal Reserve will often lower interest rates to stimulate the economy, which can result in more favorable rates for borrowers getting mortgage loans.
Cons
- Stricter lending requirements: To protect their business during a recession, lenders may institute stricter requirements on mortgages to decrease the possibility of a borrower being unable to fulfill a loan.
- Fewer options available: With less competition and lower prices, some sellers will take their home off the market or opt to wait it out, leaving less available inventory for buyers to choose from.
- Economic uncertainty: Typically, many people lose their jobs during a recession, and other conditions may cause people’s finances to be less than stable as well. Liquidity can be important during a period of economic instability, and having your cash tied up in real estate may not be ideal.
Next steps
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. Not only do agents know their markets well, they also know how to get you the best deal in any given situation, including a recession.
FAQs
It can be. Recessions put many people in difficult financial circ*mstances, meaning they are less able to afford a new home and more likely to wait it out until conditions improve. This decreased demand means less competition for homes on the market, which in turn means sellers who are more open to lowering their prices.
Experts predict that, while the housing market is certainly cooling off, there will not be a housing crash. There are five main reasons why: low inventory levels of available houses for sale, a lack of new-construction homebuilding, strong buyer demand among millennials and other demographic groups, strict lending standards and low foreclosure rates. If any of these factors were to be reversed, that could indicate a housing recession.
A recession often leaves people in belt-tightening mode at the least, and in dire financial straits at worst. This is bad for both parties, as buyers might not be able to afford the purchase anymore, and sellers might not be able to fetch the price they’re hoping for, or even find a buyer at all. But overall, the market would favor buyers — at least, those with stable enough finances to remain in the market for a home. Fewer qualified buyers means less demand for the houses available, which typically leads to lower prices.
FAQs
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.
Will 2023 be a good time to buy a house? ›
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.
Do house prices go down in a recession? ›
What Happens to Home Prices in a Recession? Home prices generally fall during recessions, with home values slipping in four out of the five major recessions between 1980 and 2008.
Will 2024 be a good time to buy a house? ›
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.
Is it better to have cash or property in a recession? ›
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.
How much did house prices drop in the recession 2008? ›
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. Distressed properties, the foreclosures and short sales that have flooded the market, accounted for 45% of all deals.
Will US home prices drop in 2023? ›
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.
Will mortgage rates go down in 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. Figures are the predicted quarterly average rates for the 30-year fixed-rate mortgage.
How high will interest rates go in 2023? ›
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%.
How long do recessions last? ›
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.
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.
Do more houses sell during a recession? ›
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.
Will mortgage rates go down to 3 percent? ›
“Returning to mortgage rates of 3% or 4% is not going to happen, in my view,” says Yun, who points out that historically rates have been higher. The low rates of 2020 and 2021 were “unique” and those that got them were “lucky,” he says.
Will 2025 be a good year to buy a home? ›
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.
Will 2026 be a good time to buy a house? ›
Housing Market Predictions 2026
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.
What not to do in recession? ›
- Becoming a Co-signer.
- Getting an Adjustable-Rate Mortgage (ARM)
- Assuming New Debt.
- Taking Your Job for Granted.
- Making Risky Investments.
- Frequently Asked Questions.
- The Bottom Line.
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.
What gets cheaper during a recession? ›
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.
How long did the 2008 housing recession last? ›
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.
How long did it take to recover from 2008 recession? ›
Recovery From the Great Recession
Following these policies, the economy gradually recovered. Real GDP bottomed out in the second quarter of 2009 and regained its pre-recession peak in the second quarter of 2011, three and a half years after the initial onset of the official recession.
Investor Michael Burry, who rose to fame when he predicted the collapse of the U.S. housing bubble before the 2008 financial crisis, has warned that the U.S. economy is likely to enter a recession this year.
Will the US housing market decline to worsen in 2023? ›
Experts are predicting another 10% to 15% drop by the second or third quarter of 2023, according to multiple sources. Several other factors point to a further home price correction.
What is the best date to close on a house? ›
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).
What is the average US home price in 2023? ›
Average home price in the United States: $436,800
The median home sales price is $436,800 as of the first quarter of 2023. That's a 32% increase from 2020, when the median was $329,000.
What will 30-year mortgage rates be in 2023? ›
McBride expects rates to fall more consistently as the year progresses. "Thirty-year fixed mortgage rates will end the year near 5.25%," he predicts.
What is the mortgage rate prediction for the next 5 years? ›
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.
What will 30-year mortgage rates be in 2024? ›
Fannie Mae: Economists at Fannie Mae, which was chartered by the U.S. Congress in 1938 to provide affordable mortgage financing, project that the 30-year fixed mortgage rate will average 6.5% in 2023 and 5.9% in 2024.
How far will interest rates drop in 2023? ›
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.
What will interest rates be in 2023 2024? ›
Direct Loan Interest Rates for 2023-2024
| Loan Type | 10-Year Treasury Note High Yield | Fixed Interest Rate |
|---|
| Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students | 3.448% | 5.50% |
| Direct Unsubsidized Loans for Graduate and Professional Students | 3.448% | 7.05% |
1 more rowMay 16, 2023
A “good” mortgage rate is different for everyone. In today's market, a good rate could be 6% for one borrower and 8% for another on the same day. To understand what a good mortgage rate looks like for you, get quotes from a few different lenders and compare them.
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.
Are we heading into a depression? ›
Many economists agree that the U.S. is, for now, not in a recession. The most recent gross domestic product report published last week showed the U.S. economy grew by 2.9% in the fourth quarter of 2022, following growth of 3.2% in the quarter before.
Is there going to be a bad recession? ›
ITR Economics is forecasting that a macroeconomic recession will begin in late 2023 and persist throughout 2024. Business leaders recently had to lead their companies through the recession during the COVID-19 pandemic, and some were even in leadership positions back in 2008, during the Great Recession.
Is it best to sell your house before a recession? ›
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.
What happens to my mortgage if the economy collapses? ›
Recessions and housing market crashes may cause your house's value to decrease. However, your set mortgage rates won't lower, meaning your monthly payments will be higher than your home's worth. While many may dip into their savings to help pay the steep bills, others may need outside assistance.
What happens to mortgages during a recession? ›
Mortgage Rates Typically Fall During Recessions
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.
Will mortgage rates rise to 10%? ›
Housing market should brace for mortgage rates hitting 10% in 2023, investment banker says.
What will rates be in 2024? ›
Policymakers expect their interest-rate hikes to push the unemployment rate, now at 3.6%, to 4.5% in the last quarter of 2023, and to 4.6% in 2024.
What are 30 year mortgage rates right now? ›
Current mortgage and refinance interest rates
| Product | Interest Rate | APR |
|---|
| 30-Year Fixed Rate | 7.11% | 7.13% |
| 20-Year Fixed Rate | 6.88% | 6.90% |
| 15-Year Fixed Rate | 6.52% | 6.55% |
| 10-Year Fixed Rate | 6.61% | 6.64% |
5 more rowsThe cost of buying a home is drifting further out of financial reach for the average American, according to a report from Redfin. The real estate website analyzed homes that went on sale last year and found that only 21% of them were affordable, meaning that nearly 80% of homes were outside the typical buyer's budget.
The demand for housing in California far exceeds the available land, which drives up the prices. To make matters worse, the state has stringent environmental regulations that make it cumbersome and expensive to build new homes. These regulations limit the supply of land even further, resulting in higher prices.
How much will my house be worth in 2030? ›
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. But across such a vast country, the picture inevitably varies.
What year is the best time to buy a house? ›
Winter is usually the cheapest time of year to purchase a home. Sellers are often motivated, which automatically translates into an advantage to you. Most people suspend their listings from around Thanksgiving to the New Year because they assume buyers are scarce.
Will 2030 be a good year to buy a house? ›
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.
What will the housing market look like in 2028? ›
OK, Looking Ahead Through 2028…
Analysts believe some of the most popular cities in California could drop in price by 10% overall. In fact, new figures from Redfin show San Francisco home values have already come down 10%, year over year.
Is it harder to sell a house during 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.
How far did house prices fall in 2008? ›
House prices fell by 15.9% in 2008, Nationwide said today - the biggest annual drop since the society began publishing its index in 1991.
Why do people sell houses during recession? ›
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.
