A recession is period of economic contraction that often increases unemployment. If you’re ready to become a homeowner and a downturn hits, you might ask yourself, Is it good to buy a home during a recession? The answer is maybe.
On one hand, you might find it more difficult to get a home loan. But if your financial situation is secure, there can be advantages to buying during a recession — including lower interest rates and lower home prices.
Here’s a rundown of the pros and cons of buying a house during a recession.
Pros of Buying a Home During a Recession
Should you buy a house during a recession? If your financial situation is stable, then there can be advantages to buying a home while the economy isn’t so hot.
Lower prices
What happens to house prices during a recession is they tend to fall. During the Great Recession from 2007 to 2009, average home sale prices fell more than 20%.
However, recessions don’t always have such an extreme impact on home prices. During the 2020 recession, home prices dipped 2% before bouncing back dramatically. Either way, any time home prices fall can be a smart time to buy.
Lower interest rates
The Federal Reserve often cuts interest rates during a recession to encourage borrowing and stimulate the economy. Buying a home when interest rates are low has distinct advantages. Saving just a fraction of a percentage point on your interest rate can save you thousands of dollars over the life of your loan.
Motivated sellers
A buyer’s market describes when supply exceeds demand, and more homes are on the market than there are buyers. This gives the buyer leverage to negotiate with the seller on price and other concessions. Recessions also can result in more foreclosures and short sales, which may give you an opportunity to buy at a reduced price.
Less competition
Because more people face financial hardship during a recession, there may be fewer buyers out there competing for the supply of available homes. This can allow you to take your time with the process and be sure you’re getting a deal that works for you.
Refinance in the future
Even if interest rates are high when you buy a home, you don’t have to be stuck with that mortgage rate forever. If qualified, you can refinance if interest rates drop in the future.
Cons of Buying a Home During a Recession
Recessions are a period of economic instability, which can make it more difficult to borrow money. Here are some of disadvantages to buying a home during a recession.
Financial insecurity
Recessions affect the overall economy and may result in layoffs and loss of income. If you or your partner lose work during a recession, you may end up needing to hold off on homebuying. If you or your partner lose work after you’ve taken out a home loan, you could fall behind on your mortgage payments and risk foreclosure.
If you decide to buy during a recession, make sure your financial situation is as secure as possible. Even if you don’t lose your job, recessions can cause companies to make pay cuts.
Title problems
Because people are more likely to default on their mortgages during a recession, properties are more likely to have title issues related to foreclosures. This makes title insurance coverage even more necessary when buying a home during a recession.
Competition from investors
When home prices dip during a recession, investors may see an opportunity to buy low and sell high. If interest rates also are low, investors have an even better reason to use their cash reserves to buy properties. When investors can afford to pay cash, sellers may prefer their house offer over yours.
Harder to sell current home
If you need to sell your current home to buy a new one, then you might have a harder time selling during a recession. A buyer’s market will put you at a disadvantage as you try to offload your current home, and you may have difficulty selling your home at your desired price point.
Less inventory
What happens to the housing market during a recession is the inventory can be slim because sellers may be less likely to list. If a property’s value has taken a hit during a recession, the owners could decide to hold off on selling until market conditions improve.
More difficult to get a loan
During a recession, mortgage lenders face a greater risk of borrowers falling on hard times and getting behind on their mortgage payments. To mitigate this risk, all types of mortgage lenders may tighten their loan eligibility requirements and conduct a stricter underwriting process. This can make it more difficult to qualify for a home loan.
FAQ
Here are answers to some frequently asked questions about buying a home during a recession.
