Is a Good Idea to Buy a House During A Recession?

The idea of buying a house during an economic recession may seem scary. After all, recessions mean job losses, falling home prices, and tighter lending standards. But surprisingly, a recession can actually be one of the best times to buy real estate. Here’s a comprehensive look at the pros and cons of buying a home during a downturn.

What is a Recession?

First, let’s define what a recession actually is.

Key Characteristics of a Recession

• A significant decline in economic activity that lasts for months or even years
• Falling GDP, incomes, retail sales, and industrial production
• Rising unemployment
• Increased loan defaults and bankruptcies

The Bank of Canada or the minister of finance determines whether the economy has entered and exited a recession by preparing the country’s economic reports using data collected by Statistics Canada. The Federal Balanced Budget Act, which has defined the terms of a recession and provided some limits on the extent to which the federal government can respond by increasing its operating budgets since 2015, governs this determination.

How Recessions Impact the Housing Market

Recessions invariably affect real estate markets. Here are some of the most common effects:

• Falling home prices and property values
• Reduced home sales volume
• Increased foreclosures and distressed properties sales
• Higher inventory of homes for sale
• Longer time on market for sellers

During the Great Recession from 2007-2009, existing home sales plunged from 7.1 million in 2005 to 4.1 million in 2010. The median home price also dropped 25%, from $221,900 in 2006 to $166,100 in 2011.

Will Home Prices Collapse Again?

Many worry that home values could plummet just like they did during the housing crisis. However, most experts believe a 2008-style crash is unlikely.

That’s because:

• Lending standards are much tighter today
• There are far fewer risky mortgage products
• The share of adjustable-rate mortgages is very low compared to the pre-crisis period

While prices are unlikely to collapse nationwide, localized downturns in the hardest hit markets are certainly possible in a severe recession.

Advantages of Buying a Home During a Recession

Now let’s look at some of the biggest advantages of buying real estate during an economic slump:

1. Pros Of Buying During Recession: Lower Home Prices

The law of supply and demand kicks in during recessions. With fewer qualified buyers in the market, bidding wars become less common and sellers have less leverage to demand top dollar.

The result is discounted home prices. While prices dropped 25% nationally in the Great Recession, deals can be found in any downturn.

2. Lower Mortgage Rates

To stimulate the economy, the Federal Reserve typically cuts interest rates during recessions. This makes it cheaper for banks to borrow money, leading to lower mortgage rates for homebuyers.

Lower rates reduce the cost of homeownership over time. And when combined with already low prices, mortgage rates create huge savings.

3. Negotiating Power: Get The Best Deal

When demand drops, buyers gain negotiating leverage. Sellers, eager to offload properties in a slow market, are more likely to accept below-asking offers and cover closing costs.

With less competition, buyers can negotiate the best possible price while still getting their dream home. Sellers may also be more willing to offer concessions, such as covering closing costs or making necessary repairs, to close the deal. Additionally, buying a home with listing agent representation can sometimes provide buyers with valuable insights about the property and the seller’s motivations. This knowledge can further strengthen their negotiating position and help them secure the best terms possible.

Cons of Buying in a Recession

Of course, recessions also come with some downsides for prospective home buyers:

1. Job Security Risks

Unemployment naturally rises in recessions as businesses cut back. Even workers in traditionally stable fields can face layoffs when money gets tight.

Without a steady income, it’s tough to get a mortgage approved or continue making payments. That makes job security critical for recession buyers.

2. Tighter Lending Standards

To reduce defaults during downturns, lenders tighten their standards. Large down payments and excellent credit become requirements for approval.

First-time buyers and those with less-than-perfect credit tend to struggle most with the restricted lending environment.

3. Foreclosure Risks

Spikes in foreclosures and short sales often dump additional distressed inventory on the market. While presenting opportunity, poorly-maintained foreclosures can turn into money pits.

Careful inspection and educated buying is a must when considering corner-cutting former owners or flippers.

Key Considerations Before Buying in a Recession

Beyond broad pros and cons, you need to weigh your personal financial situation when deciding whether to buy in a downturn:

• Do you have strong job security? Recession-proof jobs in healthcare, education, and other fields are ideal.
• Is your credit score over 740? Excellent credit helps secure approval.
• Do you have a large down payment saved? 20% down or more will get the best rates.
• Can you withstand months of unemployment? Having an emergency fund is critical.
• Are you planning to stay put for several years? Buying for the long-term minimizes risk.

If you can answer yes to these questions, a recession could be the perfect time to get a great deal on your dream home.

Historical Data on Home Buying in Recessions

Looking at past recessions provides helpful context on the relationship between the economy and housing market.

Here’s a quick overview of how home sales, prices, and mortgage rates have performed during the last four recessions:

Recession Period	Existing Home Sales	Median Home Price	30-Year Fixed Mortgage Rate
July 1990 – March 1991	-7%	-1.4%	-2.3%
March 2001 – November 2001	-6.1%	+2.9%	-1.8%
December 2007 – June 2009	-23%	-11.3%	-1.8%
February 2020 – April 2020	-17.8%	+7.9%	-1.7%

*Home sales and prices compared to 12 months prior. Mortgage rates compared to recession start.

While each recession has unique characteristics, the data indicates home prices tend to drop during downturns, while lower interest rates help maintain housing affordability.

Should You Buy a Home in the Next Recession?

While recessions can create once-in-a-lifetime buying opportunities, they also contain risks. Ultimately, you need to weigh your personal financial factors, rather than trying to time markets perfectly. But with the right prep work and careful buying, a recession purchase can lead to huge savings on your dream home.

FAQs:

Q: Is it a good time to buy a house during a recession?

A: Buying a house during a recession can have its advantages. With the housing market experiencing a downturn, you may be able to get a better deal on a property compared to when the market is thriving.

Q: What are the cons of buying a house during a recession?

A: While there are potential benefits, there are also some downsides to consider. During a recession, there may be economic uncertainty, which could affect the housing market. Additionally, if you need to sell your current home, you may face challenges due to fewer buyers in the market.

Q: How do house prices typically go down in a recession?

A: During a recession, the demand for houses often decreases, leading to a decrease in prices. Sellers may need to lower their listing prices to attract buyers, creating an opportunity for buyers to purchase a property at a lower price.

Q: Are there any benefits of buying a home during a recession?

A: Yes, there can be advantages to buying a home during a recession. In addition to potentially paying less for your home, you may also have a wider selection of properties to choose from, as fewer buyers may be in the market.

Q: How does a recession affect your home purchase?

A: In a recession, lenders may be less likely to approve mortgages, making it more challenging to secure financing for your home purchase. However, if you have stable finances and a good credit score, you may still be able to obtain a mortgage.

Q: Was the 2008 recession a good time to buy a house?

A: The 2008 recession, also known as the Great Recession, had a significant impact on the housing market. While some buyers were able to take advantage of lower home prices, others faced financial difficulties and lost their homes. It’s important to carefully evaluate your financial situation and the specific market conditions before making a decision.

Q: Is buying a house during a recession similar to buying during a traditional recession?

A: The process of buying a property during a recession can be similar to buying during a traditional recession. However, the impact on the housing market and the overall economy can vary. It’s essential to stay informed about current market conditions and seek advice from real estate professionals.

Q: Is it a good time to purchase a property in 2023?

A: The housing market can be influenced by various factors, and it can be challenging to predict future market conditions. It’s advisable to monitor the market and consult with experts for guidance based on specific economic indicators and trends.

Q: How do prices and interest rates play a role in buying a house during a recession?

A: In a recession, there is a possibility of lower home prices as sellers may need to reduce their listing prices to attract buyers. Additionally, interest rates may be lower, which can make financing more affordable for buyers.

Q: How does owning a home during a recession compare to renting?

A: Owning a home during a recession can provide a sense of stability and equity, as property values generally appreciate over time. On the other hand, renting can offer more flexibility, especially if the housing market is uncertain. It’s important to consider your long-term goals and financial situation before deciding to buy or rent.

Is It Wise to Buy a House During a Recession if Renovations or Demolitions Are Needed?

Buying a house during a recession can be strategic, especially when properties need improvements. Before committing, consider “renovate or demolish decision tips” to weigh the long-term benefits against initial costs. A well-timed investment might increase value, making challenging economic conditions a fertile ground for savvy homebuyers.

Conclusion

• Recessions allow buyers to negotiate lower prices and rates
• However, job security and lending risks exist
• For prepared buyers, recessions enable big savings
• Financial stability is vital when buying in downturns
• Long-term gains outweigh short-term pain for most

Did you know that according to a survey by Richard Morrison, 77% of homebuyers who purchased in the 2009 recession still live in their homes today with significant equity gains? With proper planning, buying a home in a downturn can pay off for decades to come.