Buying a House in Recession: Pros, Cons, and Expert Advice
In this comprehensive guide, I’m going to talk about the pros and cons of buying a house in a recession, so before you make any decisions, you’ll want to read this first.
Hi, Ramit Sethi here, entrepreneur, personal finance adviser, and founder of IWT, and I’m here to talk to you about an important decision that you might be facing right now – whether or not to buy a house in a recession.
There are definitely pros and cons to consider, so stay tuned and I’ll break it all down for you, and help you make the best decision for your family.
Table of Contents
- While we might not be in a full recession right now, the economy and the housing market are going through some unusual and unprecedented circumstances.
- There are benefits to buying a home during a recession or in recession-like circumstances including lower house prices, and less aggressive competition for properties.
- There are also some major disadvantages that buyers can experience when purchasing a home in a recession or in recession-like-circumstances, including a higher risk of unemployment leading to not being able to pay the mortgage, and incredibly high-interest rates which can make monthly payments not only impractical but in some cases impossible to keep up with. Indeed, I’d strongly advise against buying a home in such conditions.
With all of that in mind, there is no one-size-fits-all answer to the question of whether buying a house during a recession is a smart move. However, you can find a balanced review of all the important considerations below that you can use to decide that best suits your particular circumstances.
Relevancy Of This Article To The Current Housing Market Situation
The current economic and housing market situation is that inflation is cooling, and the stock market is rallying in response. House prices are increasing but at a much slower rate than earlier in the year. Overall, experts anticipate a mild recession, although the current economic situation is already affecting typical Americans.
The purpose of this article is to provide you the reader with a balanced view of both the advantages and disadvantages of buying a home in a recession. Below you will find a detailed breakdown of both along with some advice from top experts in the field that you can use to make the best possible financial decision for your needs.
Pros Of Buying A Home During A Recession
There are several vital benefits to buying a home during a recession to consider:
One of the biggest advantages of choosing to buy a home during a recession is that prices tend to be lower, so which means more bang for your buck.
Indeed, as they have risen by 45% between 2019 and 2022, a fall in house prices may be welcomed by a great many people, both looking to get on or move up the property ladder.
In particular house prices in cities are expected to decline by around 5%, while in bubble boom towns (those lived in by those in the tech industry) the price decrease could be even more.
Another benefit of buying a property during a recession is that you are much less likely to get involved in an aggressive and expensive bidding war. Fierce bidding wars on real estate were last seen during the pandemic and resulting in buyers paying way over the asking price, and using unsafe buying practices such as negating to get a full inspection before buying.
Happily, if you can avoid a bidding war, you are much less likely to pay over the asking price for a home, and you will have enough time to get the proper inspections to safeguard your investment.
Stronger Bargaining Power
The last major benefit of buying a home in a recession is that you will have a great deal more bargaining power behind you. This is because even though rates are high right now ( at around 6.47% for a 30-year fixed-rate mortgage) we can expect them to fall as inflation drops. Additionally, once you have your mortgage you have better bargaining power to refinance at lower rates in the future.
Cons Of Buying A Home During A Recession
To get a truly balanced view of whether buying a house during a recession is a smart idea we also need to look at the disadvantages you may come across:
Potential Income Loss
The first of these is potential income loss after all figures show that you are much more likely to lose your job during a recession, which means taking on a 30% mortgage can be a frightening thought.
Fortunately, right now with over 1.5 jobs per unemployed person, the figures suggest that we are not currently in a recession. Although those in the tech field may feel the pressure of potential income loss more acutely because of the high percentage of layoffs in the sector, Indeed, when combined with the originally excessive house prices seen in bubble boomtowns, such layoffs could increase the rate at which house prices fall in such areas.
Traditionally we tend to think of a recession as providing lower interest rates. However, this is not always the case. Indeed, interest rates are still quite high at the moment, despite other indications of a recession, albeit mild.
Unfortunately, high-interest rates tend to mean a slowing of the housing market, which is bad for everyone involved because it means homes are worth less than they are bought for, and buyers have less bargaining power.
What Do Experts Say?
Now you know more about both the pros and cons of buying a house in a recession, it’s time to find out what the experts say about the current economic market and buying a home in it.
National Bureau of Economic Research Outlook
First of all, on the matter of whether we are actually in a recession right now or can expect one soon, the National Bureau of Economic Research (NBER) is a good place to begin. Currently, NBER has not stated we are in a recession, although they will not do so until well into a significant economic downturn.
However, by analyzing some of the same factors as the NBER, including data on Unemployment, Non-farm jobs data, Industrial price index (IPI), Retail sales, Real personal income less transfers (PILT), and GDP we can get a good idea of whether we are in a recession or not.
Indeed, while the GDP had a downturn during Q1 and Q2 of 2022, by the third quarter it has recovered. Similarly, unemployment rates dropped back to pre-pandemic levels as of November 2022 (3.7%). It’s also true that retail sales were down 0.6% month-over-month, however, they were up 6.5% year-over-year. The Industrial Production Index has also stayed consistent since April 2022 with no nosedive.
All of these factors suggest that we are not currently in a recession. Yet, inflation remains high and the pandemic and geopolitical conflict are contributing to an uneasy economic atmosphere in both the US and globally.
This unease is leading some to label the current economic situation as a: “white collar recession,” “Patagonia vest recession,” and “Richcession”, suggesting that the people it is hitting most are the middle classes.
If you are considering buying a house during the current economic climate, the following experts provide some skilled advice that can help you make your decision:
Dawn Allcot, Yahoo Finance
Dawn Allcot Yahoo Finance states that if you do decide to buy a home during a recession then there are some specific procedures you should follow:
Firstly, she states you should always look for a home in a good location that can be easily enhanced with simple repairs to add value. Homes with significant structural damage should be avoided as they can too easily drain any potential value.
Allacott also suggests that when buying during a recession it’s vital that you do not overreach financially This means maintaining energy savings even when buying a home, as well as carefully calculating all the costs involved to make sure you can cover them without going broke.
Farnoosh Torabi, CNET
Farnoosh Torabi writing for CNET advises that it’s better to wait for more favorable economic circumstances than to buy right now.
First of all, she reminds us that with high mortgage rates buying a home could cost a significant amount more per month than renting. Around $200 she estimates, which makes it a poor choice for anyone looking to conserve their resources.
Additionally, Torabi highlights that not buying a home right now (in a bubble market that is soon to pop according to some) means you’re not running the risk of having to sell at a loss later on when a recession hits.
Lastly, Torabi emphasizes that in times of economic uncertainty, “cash is power” and that means by choosing not to buy right now you will have more immediate access to the cash you would have spent on down payment and closing costs.
Ramit Sethi, IWT
Last but not least, here’s my advice. I think that putting all of your money into buying a home isn’t always the best investment, especially in a recession or unusual economic circumstance like the ones we currently find ourselves in.
This is because the monthly cost of buying a home can be significantly more than renting, and there are extra costs to consider as well as your mortgages such as taxes, fees, and home insurance.
With that in mind, I suggest that it’s best to keep the total of your housing costs to under 28% of your GMI (gross monthly income), and your total household debt under 36% of your GMI, and if buying a home puts you over this, it’s not the right decision.
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Right now we find ourselves in some very unusual and unprecedented financial circumstances. While some may argue that we are in fact in a recession, others suggest that things are not yet that dire.
Of course, your view on whether or not we are currently experiencing a financial recession will have a distinct impact on whether you believe it’s a good time to buy a home. Indeed, there is no definitive answer to the question of whether buying a house during a recession is smart because the response will depend on your own personal and financial tolerance to mortgage rates, your employment outlook, and the market in which you hope to buy.
However, whether you agree that we are currently in a recession or not, it is important to remember that, as many experts highlight, investing in property is not the only way to secure your financial future. Buying a home in a recession, or when your financials mean it does not make sense can harm your economic stability for the future, which is why many people choose to invest the money they would have spent on a down payment and moving costs instead, Thereby keeping it liquid while maximizing the returns it makes which is a smart investment in any economic market.
Frequently Asked Questions
Is the housing market different during a recession?
Yes, the housing market is usually affected by economic recessions. During a recession, fewer people have disposable income to buy homes, so demand for housing decreases. This can lead to an increase in inventory and lower home prices as sellers become more willing to negotiate to move their property. Additionally, lenders may be less likely to offer financing, which can further dampen demand. As a result, the housing market often slows down during an economic recession.
What are the risks of buying a home during a recession?
The main risk of buying a home during a recession is that property values could continue to decrease, leaving the buyer with an asset worth less than what they paid for it. Additionally, lenders may be more restrictive when offering financing and require higher credit scores or larger down payments. Also, if a buyer loses their job after purchasing a home, they may not be able to make their mortgage payments, putting them at risk of foreclosure.
Can you still get a mortgage during a recession?
Yes, it is still possible to get a mortgage during a recession. However, the process may be more difficult as lenders may have tighter lending criteria to reduce their risk. Additionally, the availability of certain loan programs and interest rates may also be affected by economic conditions.
What are the long-term impacts of buying a home during a recession?
Positive Long-Term Impacts:
- Homeowners can benefit from lower interest rates, meaning they will pay less on their mortgage payments over the life of the loan.
- Prices for homes may also be lower during a recession, allowing buyers to purchase a home at a discounted rate. This could result in a greater return on investment when the economy recovers.
- Homeowners may be able to take advantage of tax benefits, such as deductions for mortgage interest and property taxes, which can help offset some of the costs associated with homeownership.
Negative Long-Term Impacts:
- If the recession is deep and prolonged, the home value may not rebound for a long time. This could lead to losses if the homeowner chooses to sell in the future.
- Buyers may also find it difficult to get approved for a mortgage or refinance during a recession due to tighter lending standards and higher interest rates. This can increase their monthly payments, making it more difficult to stay in their home.
- Buying a house during a recession can be risky, as the overall economic environment is uncertain. This could lead to increased financial stress and difficulties if employment or income is affected by the recession.