It’s only been a decade since the last major recession, but the sirens are blaring again. A recession comes with industrial shutdowns, low production, brutal downsizings, a nose-diving stock market, and a housing market crash.
The country saw a serious housing recession in 2008–2009. When the housing bubble finally burst and pushed the country into an economic downfall. But even in the worst condition, the average housing prices didn’t go down as much as people expected. From the peak value in 2007 and the bottom-most in 2009, the average sales price of houses sold in the US went down 20.3%.
So does that make buying a house during a recession a smart move? Similarly, is selling a house during a recession is a bad financial decision? If you are planning to wait for a recession before buying or selling, you should be aware of the risks of buying a house during a recession.
So what happens to the house prices in a recession?
The previous market crash has many people believing that the next recession will also be triggered by a housing bubble burst. This means that an over-inflated housing market will cause the economy to collapse. If the housing market becomes the trigger for an economic collapse, we might see another housing recession.
Even if the housing market is not the driving factor, the house prices will take a hit if the recession hits. The home values have seen a serious price appreciation since 2011. The prices are up almost 60%. The average growth in income is nowhere near this. So affordability has become a real issue. This is one of the major reasons prospective home buyers are waiting for a housing recession.
Realistic Price Drop
Many home buyers expect the prices to totally tank during a recession. But that’s not how it works. Very few people prefer selling a house during a recession, especially the ones who have paid off their mortgages. Who, in their right minds would sell a house, when the prices are all-time low? Most people who put their house for sale anticipating a recession, do so just before the market starts to go down.
These people expect to get the most out of their property before its worth is slashed to 4/5th of its current value. But when the recession hits, don’t expect to find cheap homes popping up everywhere. The house prices right now are high, but not overly inflated. On average, home buyers might not see a lot of price depreciation in a recession.
The case varies with the location as well. Most thriving urban markets might see larger price drops than some steady markets in the country. One of the reasons that the market took such a big hit last time was that builders were frantically building new houses. They had to keep up with the housing demands then, but this is not the case right now.
Mortgage and Interest
During a recession, interest rates are down in general. Interest rates are chiefly controlled by the Federal Reserve. When a recession hits, people become more financially cautions. They start using their credit cards sparingly, and they don’t take out new loans and focus on saving. This affects the whole economic cycle. So interest rates are lowered to encourage people to spend more and take out loans, to pump money back into the banks.
So this is one thing you can use to your advantage during a recession. If you manage to get a fix-rate mortgage at a much lower interest rate at the time of recession, you are in luck. Because even if the house you are buying didn’t drop a dollar in price during the recession, you will end up paying much less because of the mortgage you took.
But make sure you are financially backed and secure in your job and business because no matter how low the mortgage is, you still have to pay it. Which you won’t be able to if you are laid off or your business crashed with the recession.
Also, taking out an adjustable-rate mortgage during a recession is a bad call. Because the market does stabilize in usually a couple of years and interest rates start to climb up. If you paid less for 2, 3 years, just to pay more for the coming 10 years, it’s not a good deal.
Researching the Market and Location
If you have decided to take advantage of a housing recession, it is important to properly research the market. The houses that have been sitting on the market might get you a lucrative deal. But buying a house simply because it was cheap during the recession, and not in a good shape, or in a neighborhood you want to live in, might not be a good idea.
You should also research for best mortgage deals. The larger and more conventional banks won’t offer very lucrative fixed-rate mortgages during a recession, but some other lenders might. Make sure you choose someone reputable and dependable. Since a lot of people will be trying to score a good deal in a recession, make sure you stay ahead of the competition. That means pre-approved mortgages and down payment at the ready.
Make sure the property you are going for has a clear title. If someone other than the owner owns a piece in the property, there might be problems when you try to transfer it to your name.
The house prices do decrease in a recession. But not as much as you hoped, and not in places you may want to buy. But with some planning and a top realtor, you can avoid the risks of buying a house during a recession. You can also get a great deal. But it’s important to have realistic expectations, even from a market suffering through a recession.
In any case, you should be well prepared before you start hunting for a house in a recession.