Back in 2022, as inflation grew and gross domestic product (GDP) declined, many feared that the country was headed toward a recession. The Federal Reserve raised interest rates dramatically — primarily to combat inflation, which has in fact come down significantly. But Fed rate hikes affected other segments of the economy as well, including the housing market.
Interest rates are not directly tied to mortgage rates, but typically, as the one increases, so does the other. The result of pricier mortgages has been a slower housing market, with fewer buyers able to afford the purchase.
A recession typically leads to a reduced level of real estate activity, as fewer people are willing or able to buy.— Greg McBride, CFA, Bankrate chief financial analyst
“A recession typically leads to a reduced level of real estate activity, as fewer people are willing or able to buy,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “But this won’t necessarily lead to lower home prices if the supply of homes available for sale is very low.”
In fact, the supply of homes is still very low, and home prices are still very high. If you’re hoping to buy a home, what does this mixed bag of conditions mean for you? Here’s everything you need to know about buying a house during a recession.
What is a recession?
There has been considerable debate over the definition of the term. By one very simple definition, a recession is when an economy experiences two consecutive quarters of negative growth — meaning GDP shrinks for two quarters in a row. That did happen in 2022. But most experts argue that a true recession requires more than just one indicator.
Other factors, including the rate of unemployment, income, consumer spending, retail sales and industrial production all factor into determining whether or not there is a recession. The official call is made by the National Bureau of Economic Research’s Business Cycle Dating Committee. That group takes into account many different factors, including revised GDP data that becomes available months after the initial data is released, to make an official determination.
Are we experiencing one now?
The two-consecutive-quarters metric is just an unofficial rule of thumb. While the country did experience two straight quarters of negative economic growth in Q1 and Q2 of 2022, that was followed by above-trend growth, demonstrating to economists that the financial system likely wasn’t in a recession. The better question might be not whether we are in a recession now, but whether one is looming. Bankrate’s most recent Economic Indicator survey reports a 45 percent chance of entering a recession by the end of 2024. However, as of March, the National Bureau of Economic Research has not declared one.
The housing market in a recession
Economic recessions — and the response to them by the Federal Reserve — can affect the housing market in a number of ways.
During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.
But recently, the Fed has placed greater priority on defeating inflation — even if it requires slower economic growth. Higher rates typically make the cost of getting a mortgage to purchase a house more expensive. This, in turn, lowers the demand for homes in the market by pushing the bounds of affordability.
The buyers who remain in the market during times of uncertainty like this often change what they are looking for — they may find themselves in the market for a different type of home than they would be otherwise.
“There is a direct correlation between how much home a borrower can afford and the prevailing rates,” says H. Jack Miller, president of Gelt Financial in Boca Raton, Florida. “Most people are buying as much home as they can afford.”
What happens to house prices in a recession?
While the cost of financing a home increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller. (That has not been the case in today’s market, though, which further complicates the matter.)
Decreased demand and fewer buyers typically mean that fewer people are competing for the same inventory of homes. When that competition dries up, sellers lose the upper hand they enjoy in a robust seller’s market like we’ve seen in recent years. In this scenario, they would likely have to settle for less than their initial asking price — or at least less than they might have gotten in a more competitive market. And while that’s bad news for sellers, it can be good news for hopeful homebuyers.
Buying a house during a recession
Recessions often mean slower hiring, and even job loss. Obviously, this can make it harder to qualify for a mortgage and push buyers out of the market. But if you can afford to, it’s not necessarily a bad time to buy. In fact, if you remain financially stable, Miller argues a recession can actually be a good time to buy a home. “Some people hold off on buying when this happens, but I think this is a mistake,” he says. “When rates go up and demand slows, buyers can usually get a better deal on the home they want.” You can always refinance when rates go back down again.
“Periods of very low mortgage rates that coincided with a weak economy saw a housing market that was comatose, because many people won’t buy a home when the economy is in bad shape,” says McBride. “But this also provided an opportunity for better deals for those who were willing to buy.”
With all of that in mind, let’s look at some of the major upsides and disadvantages to buying during a recession.
Pros
- Less competition: A recession often puts people in a difficult financial position, leaving them unable to afford a new home or unwilling to risk it. This results in less competition within the market for those who can still afford it.
- Lower prices: With fewer buyers who can afford the purchase, home sellers will likely no longer see multiple offers or bidding wars for their properties. This can lead to lower home prices.
- Lower rates: During a recession, the Federal Reserve will often lower interest rates to stimulate the economy. This can result in more favorable rates for borrowers getting mortgage loans.
Cons
- Stricter lending requirements: To protect their business during a recession, lenders may institute stricter requirements on mortgages to decrease the possibility of a borrower being unable to fulfill a loan.
- Fewer options available: With less competition and lower prices, some sellers will take their home off the market or opt to wait it out, leaving less available inventory for buyers to choose from.
- Economic uncertainty: Typically, many people lose their jobs during a recession, and other conditions may cause people’s finances to be less than stable as well. Liquidity can be important during a period of economic instability, and having your cash tied up in real estate may not be ideal.
Next steps
Buying a home during a recession can sometimes be a good idea — but only for people who are lucky enough to remain financially stable. If you’re thinking about buying during an economic downturn, be sure to enlist the help of an experienced local real estate agent. Not only do agents know their markets well, they will also work to get you the best deal in any given situation, including a recession.
FAQs
It can be. Recessions put many people in difficult financial circ*mstances, meaning they are less able to afford a new home and more likely to wait it out until conditions improve. This decreased demand means less competition for homes on the market, which in turn means sellers who are more open to lowering their prices. So buying during a recession, if you are financially able to, may get you a better deal.
While the housing market has certainly cooled off, experts predict that there will not be a housing crash. There are five main reasons why: low inventory levels of available houses for sale, a lack of new-construction homebuilding, strong buyer demand among millennials and other demographic groups, strict lending standards and low foreclosure rates. If any of these factors were to be reversed, that could indicate a housing recession.
A recession often leaves people in belt-tightening mode at the least, and in dire financial straits at worst. This is bad for both parties, as buyers might not be able to afford the purchase anymore, and sellers might not be able to fetch the price they’re hoping for, or even find a buyer at all. But generally, the market would favor buyers — at least, those with stable enough finances to remain in the market for a home. Fewer qualified buyers means less demand for the houses available, which typically leads to lower prices.
