A recession is an inevitable period in the economy, often referred to as a pause in an otherwise expansionary period. Recessions do end, but that doesn’t mean they don’t cause damage along the way. They also affect real estate markets and interest rates.
A healthy economy includes low unemployment, increases in manufacturing, income security, and steady or climbing interest rates.
Recessions can come along suddenly, or they can be a gradual process. Regardless, recessions include several months of high unemployment. People might spend less because they’re uncertain, so business earnings go down. Manufacturing can decline because companies tighten spending, leading to job losses.
How Does a Recession Affect Mortgages and Interest Rates?
When consumers are spending less, there’s not as much of a money flow through the economy. During a recession, it’s common for the Federal Reserve to make adjustments to interest rates to minimize economic disruptions. That can help stabilize the markets, and consumer confidence can go up, encouraging more spending.
Lenders then use the adjusted interest rate to set their loan and mortgage rates.
The problem is that people are less likely to spend during a recession and would rather save, so loans aren’t in high demand.
Home prices during a recession will often decline.
What Happened During the Great Recession?
The Great Recession lasted from 2007 to 2009, and it was extremely impactful on mortgages and the housing market because of the housing crash that triggered it.
Home prices went down quickly throughout the U.S., and employment soared. Homeowners were finding themselves owing more on their mortgage than their home was worth. Many faced foreclosure.
That’s not always what happens during a recession, though. In most modern recessions, house price appreciation has stayed relatively steady, and year-over-year growth in home sales has only declined a bit.
Home prices and the sales of existing homes don’t inherently go down because there’s a recession.
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.
You Could Refinance
If there were a recession and mortgage rates went down because of it, in theory, if you had an existing mortgage, you could use it as an opportunity to refinance. Of course, to refinance you have to be approved by a lender.
That can be more difficult during a recession both because of economic factors and things happening in your personal finances.
What About Buying During a Recession?
While it can seem scary, buying a home during a recession can be a good long-term financial decision if you’re in the position to do it.
You may face less competition among buyers, lower housing prices, and lower interest rates. Since there’s diminished consumer confidence during a recession, you’re not likely to face the bidding wars that homebuyers are dealing with.
Of course, you’d have to have a steady income and be confident that it would stay the same for the foreseeable future.
Adjustable-Rate Mortgages
The type of mortgage that could be most directly affected by a recession is one that’s an adjustable-rate.
An adjustable-rate mortgage has a variable interest rate. The initial rate is below the market rate for a comparable loan with a fixed rate. Then, as time goes on, the rate goes up. If you have an adjustable-rate mortgage for long enough, the interest rate will go beyond the market rate for a fixed loan.
During the mid-2000s housing crash, borrowers with adjustable-rate mortgages couldn’t make their payments when they soared. Since then, there have been more government regulations, but it could still be an issue.
Some adjustable-rate mortgages are structured so the rate can more than double in just a few years.
If for some reason, you had an adjustable-rate mortgage and your rate quickly went up during a recession, and you were facing economic troubles or a job loss, you might not be able to make your payments.
Overall, if you’re currently a homeowner, a recession isn’t likely to directly impact your mortgage itself. It could theoretically affect your home’s value or income, however. A recession can, in some cases, create opportunities for refinancing or buying a home if you have a stable income.
Written by Ashley Sutphin for www.RealtyTimes.com Copyright © 2023 Realty Times All Rights Reserved.
As someone deeply immersed in the realms of economics, finance, and housing markets, I can affirm that the concepts and information presented in the article resonate with established economic principles and historical events. Here's a breakdown of the key concepts discussed:
-
Recession: A period of temporary economic decline characterized by a decrease in GDP for two consecutive quarters. Recessions are often accompanied by high unemployment, reduced consumer spending, and contraction in manufacturing and production sectors.
-
Economic Indicators of a Healthy Economy:
- Low unemployment rates
- Growth in manufacturing output
- Income security for households
- Stable or increasing interest rates
-
Impact on Real Estate and Interest Rates:
- During recessions, consumer spending tends to decrease, leading to reduced money flow in the economy.
- Central banks, like the Federal Reserve in the U.S., may adjust interest rates to stimulate economic activity or stabilize financial markets.
- Lower interest rates can make borrowing cheaper, potentially increasing demand for mortgages. However, during recessions, demand for loans may still be low due to reduced consumer confidence.
-
Housing Market during Recessions:
- While recessions can lead to declining home prices and increased foreclosures (as observed in the Great Recession), this isn't a universal outcome.
- In some recessions, housing markets might benefit from lower mortgage rates, making homes more affordable for potential buyers.
- Buying a home during a recession might offer advantages like reduced competition, lower prices, and favorable interest rates. However, stability in personal finances is crucial.
-
Adjustable-Rate Mortgages (ARMs):
- ARMs have variable interest rates that can fluctuate based on prevailing market conditions.
- While ARMs might offer lower initial rates than fixed-rate mortgages, they carry the risk of increasing rates in the future, potentially becoming unaffordable for borrowers, especially during economic downturns.
- The mid-2000s housing crisis highlighted the vulnerabilities associated with ARMs, leading to regulatory changes.
-
Refinancing Opportunities:
- If mortgage rates decline during a recession, existing homeowners might consider refinancing their mortgages to capitalize on lower rates. However, economic conditions and personal financial situations can influence refinancing feasibility.
In summary, economic recessions have multifaceted implications for real estate markets, interest rates, and mortgages. While historical events like the Great Recession provide insights into potential challenges and opportunities, individual circ*mstances, market conditions, and regulatory environments play crucial roles in shaping outcomes.
