Potential homebuyers and nearly everyone else shudder just by hearing the word recession. If you are thinking, how does a recession affect the housing market, or should you consider purchasing a home during a downturn? We’ve drafted this in-detailed article to answer your query.
Keep reading to discover whether a recession is a good time to invest in a home and know the factors for a smooth home buying journey!
What is a Recession?
According to the National Bureau Of Economic Research (NBER), the classic definition of a recession is a consistent drop in economic activity that lasts over a few months. The NBER is responsible for making an official announcement or declaring a recession.
A recession is said to be a part of the economy that slows employment, income, industrial production, gross domestic product, and retail.
Does A Recession Affect The Housing Market?
Recessions are known to have a significant effect on real estate. When the economy is struggling, fewer people may be able to afford a home. When supply exceeds demand, properties may stay on the market for much longer, and housing prices may fall to improve sales. If people cannot repay their loans, mortgage delinquencies and foreclosures may rise.
In the face of a recession, some anticipate falling prices, while others do not. However, it’s questionable how much the home market will stabilize.
According to a recent survey, in the USA, only a two-month supply of homes is available, less than the historical average of six months. Following the housing crisis, the Covid-19 pandemic significantly reduced the pace of home development.
Should You Buy A Home During A Recession?
Every homebuyer will be in a different and unique financial situation during a recession. Only they can decide whether buying a house during a recession is achievable for them and their family.
However, if you’re a first-time home buyer, you must avoid certain mistakes, especially when purchasing a home during a recession. We have listed some pros and cons of buying a home during a recession; take a look to decide whether it’s a suitable option for you.
PROS
- Mortgage Rate Drops
During a recession, the Federal Reserve often reduces interest rates to boost the economy. Banks cut all of their rates as a result, including the mortgage rate. If your mortgage rate is lower, you will pay less for your house over time.
- Lower costs
Homes typically stay on the market longer during a recession since there are typically fewer buyers. The sellers will reduce their listed prices to make the home easier to sell. Some sellers also offer various perks to incentivize buyers, including a home warranty. It helps both buyers and sellers to protect their investments. If you close a deal and the seller offers you a home warranty, confirm with them as to who will pay for the home warranty.
CONS
- Challenge to sell your house
If you have to sell your present house to buy a new one, doing it in a recession could be troublesome. Depending on where you live, the recession may cause you to receive less money than expected or cause your house to remain on the market for longer than anticipated. If you are not too worried about how much you will get for your home, you just want to get it sold as quickly as possible, you may want to look online for cash selling companies by typing in “how do I sell my house for cash?” They can buy your home as-is, meaning you won’t need to do upgrades or repairs which can cost a lot, leaving a bit more extra for you.
- Rising unemployment
During a recession, unemployment rates spike, putting many positions at risk of reduction or termination. Even if you believe your position or sector is stable, things can change quickly.
Hence, this is the most crucial factor that can affect your buying decision during a recession. Also, remember that a mortgage isn’t the only expense associated with property! You may also have to pay for other expenses including EMI or any future loan.
- Banks may not lend money
Banks will be aware that economic instability can influence anyone’s job in such scenarios. So lenders are less inclined to grant mortgages in this economic climate out of concern that they may have to repossess your house.
Final Words
The housing market continues to surprise everyone with the ups and downs in its pricing! So before purchasing a home during a recession, you will need to assess your existing financial condition and carefully consider the factors affecting your purchase. This way, you can protect your investment and enjoy it in the long run.