Landlord tips & tricks

Is a Recession a Good Time to Buy a House?

“You make your money when you buy, not when you sell.”  If you invest in real estate, recessions may be a favorable time to increase your investment by purchasing a property. Why? Recessions mean reduced demand for houses. When supply exceeds demand, prices fall. But you will need to be able to take advantage of these lower prices. The rest of this article will focus on how recessions affect the housing market, how recessions can lead to unexpected challenges, and how to prepare to buy a house during a recession.

Recessions and the Housing Market

Three characteristics of recessions have a major impact on home prices:

  • Increasing unemployment
  • Increasing loan defaults
  • Decreasing consumer confidence

When unemployment increases, there will be fewer potential purchasers of homes. That leads to a reduction in demand. Also, when unemployment increases, foreclosures increase. Foreclosures increase the supply of houses on the market. The reduction in housing demand and the increase in housing supply puts downward pressure on home prices.

When loan defaults increase, lenders tighten their requirements. That means fewer potential purchasers qualify for mortgages. This is another reduction in demand, putting downward pressure on home prices.

Decreasing consumer confidence is a catalyst for all the other economic issues in a recession. When consumers see layoffs and increasing unemployment, they usually spend less. This behavior magnifies the initial causes of a recession. Industry decreases output because of lower consumer demand. When industry decreases output, unemployment rises more. 

All Recessions Are Not the Same

No two recessions are the same. How a recession affects home prices depends on many factors. Some of these factors include:

  • The housing inventory before the recession
  • Inflation and monetary policy
  • The depth of the recession

The housing inventory is extremely low in July 2022. This is because demand has been outpacing supply. Usually, there is a four to six month supply of houses on the market. At present, there is a two-month supply. This factor shows housing prices will not fall as much as in prior recessions. 

Usually, during a recession, the Federal Reserve Board (the Fed) reduces interest rates to stimulate the economy. This is especially helpful with large purchases like homes that require loans. Lower interest rates mean the total interest paid over the life of a mortgage is much lower. This means, even if housing prices remained the same, you would pay substantially less for the home over the term of the mortgage.

Related Reading: Are Townhomes A Good Investment?

The History of Recessions Mixed With High Inflation

For the past two recessions, the inflation rate was low before the recessions started. This is not the case in July 2022.

The last time inflation was so high was in the early 1980s. Consider the double-dip recession of 1980-82. Unemployment hit 10.8%. The inflation rate for 1980 was 13.55%. The Fed’s discount rate hit 14%. The Prime Interest Rate, the rate lenders give customers with the highest credit rating for non-mortgage loans, was as high as 21.5% and remained in double digits until 1985. In October 1981, the average 30-year fixed mortgage rate was 18.63%. 

The annualized inflation rate for May 2022 was 8.6%. That is far lower than where inflation was before the 1980-82 recession, so it is not all doom and gloom. The inflation rate hit 5.4% before the 1991 recession and that was a fairly mild recession. The data is as follows for that recession:

  • Unemployment hit a high of 7.7%
  • The Prime Rate hit 11.5%
  • The average 30-year fixed mortgage rate hit 10.54%

Where Are We Now?

Except for 8.6% inflation, we have had a robust economy. The other indicators are:

  • The unemployment rate is 3.6%
  • The Prime Rate is 4.75%
  • The average 30-year fixed mortgage rate is 5.7%.

So everything looks good except for one thing. Inflation usually hits its highs shortly before a recession. Interest rates increase before and during the recession. Then, unemployment peaks and recedes after the recession has ended. 

What’s the takeaway? If you buy a house during a recession that is accompanied by high inflation, it’s a good idea to make sure not to use an adjustable rate mortgage. You could see shocking increases in your mortgage payments. Fixed-rate mortgages are the only safe mortgages when inflation is high.

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    Prepare Now for Opportunities During a Recession

    Many experts believe there is a high probability we will have a recession soon. There are a few steps you can take to be prepared and even buy a house in the middle of a recession. If you are already a homeowner, it would be nice if you could sell now while prices are still high and then buy your new home when prices are low — during a recession.

    If you are interested in real estate investments during the recession, you may do better by investing in real estate investment trusts (REITs). Unlike buying a house, you will not have to borrow a large sum of money to invest in a REIT. 

    If you are planning to buy a house to live in, but are waiting for prices to drop, there are some other steps you should take:

    • Improve your credit score
    • Hang on to your job
    • Increase your income streams
    • Save and invest

    Olivia Oberling of Fixed Properties LLC explains, "Buying a home during a recession can be a good thing or a bad thing depending on your goal and your timing. Can you get a home for a killer price during a recession? Absolutely! Could you also get stuck with a really high interest rate? 100%. If you’re buying to invest, the recession can be an opportune time to get a low price on a solid investment property, or even an entire portfolio. You might have to bite the bullet on the interest rate now, but you’re probably already planning to refinance in a few years to a lower interest rate. Just keep in mind, people are struggling during a recession, so you’ll need a cushion to handle renters that can’t pay or cover long-term holding costs if you’re planning to flip for profit. If this is your personal home you’re looking to buy, you can still get a good price. Just make sure your credit score is high so you can get the best interest rate possible and don’t lock yourself into a fixed mortgage rate when they’re high."

    Improve Your Credit Score

    During a recession, lenders tighten their loan requirements. It’s harder to get a mortgage, and it’s harder to get the best interest rates. To make matters worse, most credit reports have errors. These errors must be fixed. 

    Several years ago, the government forced the credit bureaus to establish a website where they must provide free credit reports at least once per year. The website is annualcreditreport.com. You may have heard of other websites that provide free credit reports, but these are often sites that lure you into paying for subscription services. 

    You should start working on your credit at least six to twelve months before purchasing a new home. Start by reviewing your credit reports. That means look at all three of the major credit bureaus. An error in any of these reports will harm your chances of getting a mortgage at a decent interest rate.

    How do you fix these errors? You can do it online or by phone with the credit bureaus. It is advisable not to use these methods. You should send credit bureau disputes via certified mail with a return receipt to the following address:

    Equifax

    P.O. Box 7404256

    Atlanta, GA 30374-0256

    Experian

    Dispute Department

    P.O. Box 9701

    Allen, TX 75013

    TransUnion

    Consumer Solutions

    P.O. Box 2000

    Chester, PA 19022-2000

    By using certified mail to these addresses, you will better preserve your legal rights should an attorney be necessary to resolve the issues. 

    Though you can dispute directly with the creditors, it is best to send your dispute to the credit bureaus with an informational copy to the creditor. The creditor and the credit bureau have potential liability under the Fair Credit Reporting Act (FCRA) when you file a dispute with the credit bureau. If you dispute only with the creditors, you are letting the credit bureaus off the hook.

    The Consumer Financial Protection Bureau (CFPB) has an excellent resource showing exactly what you need to provide with your dispute letter. The credit bureaus will demand proof of your identity, such as your driver’s license and social security number. Don’t be concerned about providing the social security number. They only ask to ensure that you are who you claim to be.

    Related Reading: How to Start Rental Property Business? Here Are 6 Tips

    Job Stability Is Important

    Recessions lead to higher unemployment. Banks and mortgage companies will not make loans to borrowers who face a high likelihood of unemployment. That is why the time at your current employer matters. It’s often the newer employees that are the first to lose their jobs in a recession.

    If you are thinking about taking a new job, wait if you are planning to buy a house during a recession. Job stability affects your ability to get the best mortgage rates or to get a mortgage at all. Of course, if the new job pays substantially more, the higher income could be more beneficial than job stability when applying for a mortgage. 

    Multiple Income Streams

    Having other income streams besides your primary job is good. These other streams could be from passive real estate investments like rental properties or from side hustles. Or maybe you live in a two-income household. Joint mortgages are often easier to get for this reason. Lenders like to see multiple income streams since you don’t have all your eggs in one basket

    Savings and Investments

    These are liquid assets that can be used should you lose your job. It is just another fallback lenders are looking for when they tighten their loan policies. 

    Conclusion

    It is a great idea to buy a house when the prices are lower. During a recession, it is much easier to find bargains in the housing market. But, it is also more difficult to get a mortgage. That’s why it is best to prepare now so you can get the best possible mortgage rates when you find the right property at the right price.

    If you cannot find a mortgage during a recession, invest in a REIT when prices are low. After the recession, the REIT’s value should be much higher. You could use these investment gains for a down payment on your dream home after the recession. Once a recession has ended, it takes a while for housing prices to rebound, so you should still find some bargains.

    Table of Contents

    Recessions and the Housing Market

    All Recessions Are Not the Same

    The History of Recessions Mixed With High Inflation

    Where Are We Now?

    Prepare Now for Opportunities During a Recession

    Improve Your Credit Score

    Job Stability Is Important

    Multiple Income Streams

    Savings and Investments

    Conclusion

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