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How Buying a Home Differs During a Recession

Should I Buy a Home During a Recession?

Is It Risky to Buy a Home During an Economic Downturn?

When a recession hits and wallets tighten, you may question whether it’s the right time to buy a house. But are those questions justified? Here is what you need to know about buying a home during an economic downturn.

How the Economy Influences the Housing Market

THE STOCK MARKET

The stock market reflects a portion of the economy. It does a great job of capturing the health of Fortune 500 companies, but it doesn’t show how small or mid-size businesses are doing. While the stock market can be a bellwether for the housing market, a recession doesn’t mean the housing market will slump.

ATTOM Data Solutions, a real estate data company, looked at house prices in the five US recessions since 1980. Only twice, in 1990 and 2008, did property values decline. In the other three instances, house prices increased from 1.9 to 4.8 percent.

MORTGAGE INTEREST RATES

Mortgage interest rates determine how much you borrow and your monthly mortgage payments. As a rule of thumb, interest rates are high during economic prosperity and low during downturns. Buyers can use a recession to secure low rates when they buy a home or refinance.

THE UNEMPLOYMENT RATE

A high unemployment rate typically hurts the housing market. Job losses remove potential buyers from the market. Few people can commit to a significant life purchase when their job security is in question.

SUPPLY AND DEMAND

Supply and demand are the most influential factors on the housing market. These fundamental concepts from Econ. 101 say the more houses there are, the less demand there is. This, in turn, drives down prices. Conversely, when a desirable area has high demand without many sellers, housing prices rise.

Here’s a cheat sheet to remember all that:

  • High supply + low demand = the lowest prices
  • High supply + high demand = moderate prices
  • Low supply + low demand = moderate prices
  • Low supply + high demand = the highest prices

Another way to think about supply and demand is as seller’s markets and buyer’s markets. A seller's market favors sellers because there is high demand, but few available houses. Therefore, sellers can sell their home faster and above the regular asking price, knowing buyers don't have many alternatives.

A buyer’s market has a lot of properties available, but fewer customers. Buyers can take advantage of houses being on the market longer, too. As more houses become available, it increases homeowners’ willingness to make concessions.

Benefits of Buying a Home During a Recession

LOWER ASKING PRICES

According to Zillow, home prices will fall two to three percent nationally due to the coronavirus, though other sources estimate a 15 percent drop. Either way, that figure was 27 percent during the Great Recession. Buyers can expect dips in asking prices as homeowners try to downsize or relocate amidst a downturn.

One complicating factor is the decline in pending homes sales. Zillow estimates 60 percent fewer houses are going to market. Put another way: the supply and demand for housing dropped simultaneously, which is why housing prices have stayed roughly the same.

LOWER INTEREST RATES

Buyers can capitalize on low prices and low interest rates during an economic downturn. Interest rates fall early and only rise when the economy starts to recover. Lenders often tighten credit requirements, which means you need excellent credit to qualify for the best rates.

There’s a strong correlation between interest rates and the economy’s health. For instance, the Federal Reserve has only slashed the Fed funds rate to nearly zero twice. Both cases, 2008 and 2020, were at the beginning of a recession.

SELLERS MAKE MORE CONCESSIONS

Have you ever posted an item on Craigslist or eBay and waited for it to sell? Then waited and waited some more? That's what many homeowners go through during an economic downturn. The tempered demand means that homes stay on the market for longer, even though some homeowners desperately want to sell.

As a result, a homeowner may make concessions. They may agree to pay closing costs or leave large appliances to get their homes off the market. Every negotiation is unique, but buyers have increased leverage in a tight economy.

Risks of Buying a Home During a Recession

FORECLOSURE AND SHORT SALES

Buying a short-sale or foreclosed homes means a deal on the final price. Those upfront savings may mean future expenses elsewhere. Many banks and credit unions sell properties as they are, so buyers likely won’t get additional credits for necessary home renovations or problems you find during the home inspection.

HARDER TO SECURE FINANCING

Lenders are constantly looking to minimize their risk. During an economic downturn, that means tightening credit requirements. Banks and credit unions typically lend less money, so you’ll need to show proof of savings and strong credit to secure financing.

You should be fine if you’ve saved for a down payment for a while. It’s much harder to secure a loan with a small down payment, like a USDA loan, VA loan, or FHA loan. These loans are riskier for lenders because borrowers have less equity in the home and less financial stake to stay in it.

MORE COMPETITION WITH INVESTORS

More investors buy homes during a recession. They use the home as a rental property and try to sell it when housing prices recover. The average person has a difficult time competing with investors, who can pay cash up front.

Factors to Consider When Buying a Home

THE PRICE RANGE

The risk of buying a home during a recession correlates with how much house you want. Low-tier homes experience the sharpest decline in prices while high-tier homes are a relatively safe investment. The Federal Reserve Bank of St. Louis conducted a study on the heels of the Great Recession to demonstrate this point.

The bank’s economists looked at the home price index for 16 metro areas from 2006 to 2012. In all but one case, low-tier homes lost the most value, and high-tier homes retained the most value. If you’re looking to buy a house during a downturn, you’re more likely to find a bargain condo than a mansion.

YOUR FINANCES

Take a good hard look at your finances. How much do you have saved for a down payment? How stable is your job? What are your expenses now, and how will they change in the following years?

Buying a home during a recession can be a deal if you’re financially prepared. Job instability or shaky business profits can transform a home purchase into a ball and chain. If you’re unsure about your financial preparedness, talk it over with a United mortgage advisor.

The Bottom Line

Remember, a recession is not a sure sign that house prices will fall. More often than not, they rise. Still, you can use an economic downturn to your advantage to find the house you want at a price you love.

There’s no magic formula to buying a home during a recession, though, there are some factors that help. That includes a stable job, substantial savings, and plenty of research. Above all else, be patient. There's no sense buying a home if you can’t get a price or terms that work for you.

United Routing Number: 272484894

 

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