During this time of global uncertainty, buying a home may be the last thing on your mind. But investing in a relatively stable asset like a home during an economic downturn can actually be a smart move, depending on your financial situation.
How a Recession Affects Real Estate Prices
A recession is a time when the economy stops growing, but in many cases, that’s the only thing various recessions have in common. It can be misleading to try and predict a future recession based on a previous one.
The Great Recession of 2007-2009, for example, was directly tied to the housing market. It was triggered by rampant subprime mortgages, and many homeowners were foreclosed upon. The surplus of housing built during the housing bubble had few takers, resulting in a large supply of cheap properties.
Existing home sales plummeted from 7.1 million in 2005 to 4.1 million in 2010, and the median home price fell from $221,900 in 2006 to $166,100 in 2011. Although the Great Recession has created an association between economic downturns and plummeting home prices, home values actually increased during three of the past five recessions.
It is clear that we are now in the midst of another recession as a result of the COVID-19 pandemic. Although the full impact of this recession on the real estate market remains to be seen, there is little evidence to suggest that home prices will drop significantly. In fact, there’s a chance prices could even go up.
There has been a decrease in buyer interest in recent weeks, according to a series of flash surveys conducted by the National Association of REALTORS®, which in normal circumstances might lead to a drop in home prices. However, that decrease has been accompanied by an increase in the number of homes being taken off the market, diminishing an already scarce housing supply. When the nation eventually reopens for business, the real estate market will likely see a strong rebound, according to NAR Chief Economist Lawrence Yun, and buyer interest will probably rise again, along with home prices.
Benefits of Real Estate Investment During a Recession
As with the stock market, it makes sense to buy low and sell high. When the economy is booming, real estate tends to be a seller’s market, with high home prices and hefty mortgage interest rates. But during a recession, the odds can be in the buyer’s favor. A few benefits of buying a house during an economic downturn include:
- Lower mortgage interest rates: When the Federal Reserve slashes the target federal funds rate to balance an ailing economy, one indirect result is often lower mortgage interest rates for prospective homebuyers. Lower mortgage interest rates create an opportunity for lower-cost borrowing.
- Increased home value down the road: If you buy during an economic downturn, it makes sense that the home value will buoy as the economy recovers, leaving you in a better place financially.
- Lower home prices: Although not always the case, recessions can sometimes cause a drop in home prices.
- Less competition from other buyers: Many people are not in a position to purchase a home during a recession, so you will likely see less competition in the market from other homebuyers.
- More room for negotiation: If sellers are anxious to sell, they might be more willing to throw in some extra incentives, such as furniture, appliances, or assistance with closing costs.
These are just a few of the possible perks of entering the market during a recession, but there are also plenty of downsides involved.
Drawbacks of Investing in Real Estate During a Recession
Of course, real estate investing during a recession isn’t for everybody. There are always going to be risks that come with good investment opportunities. Here are a few common drawbacks to buying a home during an economic downturn:
- Potential job loss: Economic instability could mean your job isn’t secure either. The coronavirus pandemic has triggered an unprecedented spike in unemployment claims—a staggering 10 million in the span of two weeks. Those among the 10 million are probably not in the best position to buy a home at the moment.
- Possible difficulty getting a mortgage: After the hard lessons of the last recession, many lenders have more stringent lending practices in place. Guidelines regarding getting a loan could loosen to allow for more lending in light of the global pandemic, but that remains to be seen.
- Increased competition from investors: Although individuals tend to buy less during a recession, investors often take the opportunity to increase assets.
- Risk of walking into a money pit: If a homeowner has been struggling for a while before choosing to or being forced to sell their home, there’s a chance the home is behind on repairs or other payments you may be stuck with.
Despite the downsides involved with buying a home in the midst of a recession, investing in real estate right now could still be a good idea for you.
How to Decide if You Should Invest in Real Estate During a Recession
The decision of whether to buy a home during a recession will depend on a number of factors. If the following statements apply to your situation, you may be in a good position to take advantage of the current housing market:
- You have a stable job unlikely to be affected by the recession.
- You have a sizable nest egg in case things get worse before they get better.
- You don’t mind a bit of risk.
- You’re willing to hold out for long-term gains.
It’s also worth considering whether you’re eligible for any government loan programs that could make buying a home even more affordable. If the property you’re looking at is in a designated rural area, for example, you may be able to buy a home with no down payment using a USDA home loan.
How to Begin the Home-Buying Process
If you’ve decided that you are in a good position to buy a home during this recession, the next step is to connect with one of our loan officers and begin the process of getting pre-approved for a mortgage. To learn more about navigating the first-time home-buying process, connect with a radius loan officer today.