Recessions are uncertain economic times that may make it more difficult to take on financial commitments like buying a house, but they also present opportunities for those fortunate enough to have financial stability.
If your finances are relatively steady and secure, then you could take advantage of reduced demand in a recession to get a good deal on a home. If your financial future is less predictable, then the risk of buying a home may be too much to take on — especially for first-time homebuyers — and finding a mortgage lender may be more difficult.
Here are some of the benefits and drawbacks to buying a home during a housing market recession:
- What Is a Recession?
- Are We in a Recession Now?
- How Does a Recession Affect the Housing Market?
- Pros of Buying a Home During a Recession
- Cons of Buying a Home During a Recession
- FAQ: Should You Buy a House During a Recession?
- The Bottom Line on Buying a Home During a Recession
What Is a Recession?
A recession is a period of economic contraction.
Typically, economies grow over time, with this growth measured through increases in a country’s gross domestic product. When that happens, employment generally stays high, wages grow, and companies produce more goods.
During a recession, GDP falls, unemployment may rise, and wages may fall.
A common rule of thumb is that a recession happens when GDP falls for two consecutive quarters, but there is no official definition of a recession. Instead, economists look at economic data holistically, considering the labor market, consumer and business spending, output, and incomes to determine when the economy enters a recession.
To put things simply, a recession is when the economy is getting worse, and people are less secure financially.
Economies are generally cyclical, with good times punctuated by occasional recessions that lead back to growth. That means that we can look at previous recessions to understand what happens to the housing market during a recession.
The 2008 recession, also called the Great Recession, was caused by a bubble in the housing market. It came on the heels of a huge expansion in housing construction, home prices, and the availability of subprime mortgages. The years 1998 to 2006 saw home prices more than double and mortgage debt balloon from 61% of GDP to 97%.
When the bubble burst, home prices fell precipitously. Prior to the recession, the average price for a single-family home peaked at $322,100 in 2007. The year 2009 saw prices hit their bottom at $257,700 — a fall of almost 20%.
Largely spurred by the COVID-19 pandemic, the 2020 recession saw a massive decline in productivity as economies shuttered and lockdowns went into effect. Average home prices saw a slight decline between the first and second quarters of 2020, falling about 2% from $383,000 to $374,500.
Though the onset of the pandemic in early 2020 caused housing prices to fall slightly, average home prices spiked massively in the months that followed, jumping to $397,800 in the third quarter of that year and reaching nearly $500,000 by the end of 2021.
Reasons for this recovery include economic stimulus from the government and low interest rates that made borrowing cheaper for buyers.
Are We in a Recession Now?
As of the start of 2023, the United States is not in a recession. Though GDP shrank in the first two quarters of 2022, meeting the informal definition of a recession, the government determined that the economy wasn’t truly in recession. The third quarter of 2022 also saw growth in GDP, which would have been enough for many to consider a recession over.
How Does a Recession Affect the Housing Market?
If you’re looking to buy a home, you’ll want to know what a recession means for the housing market.
In general, housing market recessions are less competitive for buyers. Prices fall and more homes become available. Borrowing can become more difficult, meaning there are fewer people competing for homes.
Historically, home prices have fallen during recessions. The price decreases can vary depending on the causes and timing of the recession. For example, the decline during the 2008 recession — caused by a housing bubble — was much more dramatic than the fall in the 2020 recession.
Of course, some recessions break this mold. The 1980 recession, for example, saw home prices rise steadily.
During a housing market recession, home inventory tends to increase. This can happen as some homeowners become unable to afford their mortgage payment and need to sell. At the same time, fewer people can qualify for loans or feel financially secure enough to purchase a home, meaning more homes are available for fewer buyers.
However, Adam Smith, president and CEO of Colorado Real Estate Finance Group in Greenwood Village, Colorado, notes that this isn’t the current case in the United States. Demand for homes exceeds supply by a wide margin, which makes it less likely that a housing market recession would cause a significant decline in prices, or increase the availability of homes for sale.
“In theory, a recession would drive home values down,” Smith says. “Unfortunately, that is unlikely to happen in this recession as the housing shortage is going to trump that problem. In fact, there is little in the way of economic change that would even begin to impact that supply and demand issue.”
Typically, recessions see interest rates decrease as the Federal Reserve slashes benchmark rates to encourage borrowing and help the economy recover. Because mortgage rates are tied to these benchmarks, mortgage rates drop as well, reducing loan costs for borrowers.
However, the Fed increased the target federal funds rate seven times in 2022 to counter inflation. Mortgage rates followed suit, with the average interest rate for a 30-year fixed-rate loan more than doubling in 2022 from 3.11% to 6.42%.
Ability to borrow
It often can be more difficult to get a loan during a housing market recession. Recessions are uncertain economic times, and people may lose their jobs or see their incomes fall. Lenders might tighten their criteria to qualify for a mortgage to limit the risk of borrowers defaulting on their loans. The tendency of housing prices to fall during recessions also means that the homes securing the loans offer less security, forcing a further tightening of standards.
Even if you’re approved for a loan, the lender might approve you for a smaller loan than it would offer you in a stronger economy.
Pros of Buying a Home During a Recession
Once you know how things work in the housing market during recessions, you can understand the advantages of buying during one.
Prices may decrease
The obvious advantage of buying during a recession is that prices tend to fall. If you’re buying a home, you want to get the lowest price possible because it means borrowing less, a lower monthly payment, and cheaper overall loan costs.
But Ken Sisson, a Studio City, California-based Realtor, recommends against trying too hard to time a purchase to get the best deal.
“Over the long haul, real estate prices rise significantly and regardless of short-term ups and downs, economic recessions, and market slumps,” Sisson says. “Hindsight is always 20/20 and we see market tops and bottoms of the market in the rearview mirror. They’re impossible to determine in real time. If you’re able to find a home you can afford without stretching your monthly budget, and even allow you to save for the unforeseen, you’re in a good spot, recession or not.”
Interest rates may be lower
The Fed often cuts interest rates during a recession to encourage borrowing and spending to return the economy to growth. Lower rates have a massive impact on mortgage costs.
For example, a 30-year mortgage for $400,000 at a 7% interest rate would cost you $2,661 per month, or a total of $957,960. Cut that rate to 4%, and it would cost just $1,910 per month, or $687,600 overall.
Sellers may be more motivated to sell
As a buyer, you have more negotiating power if sellers are motivated to sell their homes. You can offer less money, include more contingencies in your offer, negotiate harder, and generally be pickier when it comes to buying a home.
Cons of Buying a Home During a Recession
You might think that all of this means it’s good to buy a house during a recession. However, recessions are uncertain economic times, and there can be drawbacks to buying during one.
Risk of losing your job or income
Recessions mean a worsening economy where companies often lay off employees and people lose their jobs. Those who remain employed may see smaller or no raises, or even pay cuts. If you lose your job or your income falls, lenders will see you as a greater risk and be less likely to offer you a mortgage. And if you can no longer afford your monthly mortgage payment, then you’ll face foreclosure.
Loans may be more difficult to get
Lenders tend to tighten their purse strings during recessions. You’ll have to meet stiffer underwriting requirements to qualify for a mortgage. If you were on the cusp of qualifying when the economy was strong, you may not be able to get a mortgage during a recession.
Title issues may be more common
Title problems become more common during a recession, making title insurance even more desirable, says Kendric Richardson, a Realtor and broker associate at Berkshire Hathaway HomeServices in Chicago.
“People may be more likely to default on their mortgages or sell their homes quickly under (financial) duress,” Richardson says. “It’s essential to do thorough due diligence when buying a home to ensure no hidden issues with the property.”
It may be more difficult to sell your current home
If you own a home and plan to sell it to pay for a new one, you’ll be dealing with all the pros and cons of experiencing the housing market in a recession. Expect it to take more time to sell and to receive lower bids for your home.
Competition from investors
During a recession, investors are well positioned to buy homes. Why? Well, what happens to home prices in a recession? They fall, and that attracts investors, who look to buy low and sell high while taking advantage of low rates.
Investors also tend to have large cash reserves, which means buying a house during recessions is easier for them. They can pay cash or show lenders that they are in a secure financial position. The strength of their offers can make them more appealing to sellers who are motivated to sell their homes.
These days, many investors are large institutions that can easily afford to get into the housing market. In some markets during the past few years, more than 20% of homes have been sold to investors.
FAQ: Should You Buy a House During a Recession?
It can be difficult to know if a recession is a good time to buy a house. Make sure you understand the ins and outs before doing so.
To buy a home during a recession, you need to be in a stable financial position. That means keeping your job and income, and having a good credit score. You can do your best to withstand the stresses of a recession if you set yourself up for success by finding a good job, saving money, and building your credit.
Typically, during a recession, interest rates go down. Adjustable-rate loans have lower initial rates, but the rate can increase whenever the rate adjusts. If you get a fixed-rate loan when market rates are low, you can lock in that mortgage rate for as long as 30 years. ARMs have shorter rate guarantees, usually three, five, or seven years.
During a recession, you might prefer a fixed-rate mortgage vs. an ARM for their long-term certainty, unless you plan to sell your home in the next few years.
The Bottom Line on Buying a Home During a Recession
Buying during a recession gives you the chance to secure a lower interest rate and pay a lower price for your dream home. However, buying also can be more difficult. Between the uncertainty of whether you’ll maintain your income and tightened lending standards, you’ll need to make sure you’re in a financially secure position before you sign on the dotted line.