If you're looking to buy a house, you might be wondering if you should buy a house or wait for a recession. It’s essential to weigh the pros and cons of buying a house now versus waiting for a recession. Buying a house during a recession can be a good idea if you are qualified and willing to wait for prices to drop. However, there are risks during any economic downturn. Recession buyers will need a high credit score, strong finances, and stable income.
Should I Buy a House Now or Wait for Recession?
Real estate experts say that if you can afford to buy a home right now, you should. However, mortgage rates are high and have been higher than they've been in more than 22 years. According to a recent article by Yahoo Finance, the housing market has seen a significant surge in prices throughout the pandemic, and the Federal Reserve’s efforts to control inflation have led to an increase in mortgage rates 1.
However, the Forbes Advisor suggests that waiting for a recession to buy a house may not be the best idea. The article states that home prices generally fall during recessions, but they can rise or fall depending on various factors such as supply and demand dynamics, geography, and outlook for the labor market 2.
Moreover, Realtor.com suggests that if you’re financially sound, buying a house during a recession can be a good idea. Foreclosures and short sales may be enticing due to low offer prices, but they carry some risks and potentially higher costs 3.
Pros and Cons of Buying a House During a Recession
When considering buying a house during a recession, it's essential to weigh the pros and cons carefully. Here's a breakdown of the potential advantages and drawbacks:
- Mortgage Rates May Drop: During a recession, the Federal Reserve may lower interest rates, potentially resulting in lower mortgage rates.
- Home Prices May Drop: Recessions often lead to a decrease in home prices, making it easier to find affordable homes in the market.
- Less Competition: With fewer people looking to buy homes during a recession, there's reduced competition for available properties.
- Lower Total Cost of Home Purchase: Lower mortgage rates mean a lower total cost over the life of a home purchase.
- Cheaper Overall Loan Costs: Lower home prices mean borrowing less, resulting in a lower monthly payment and cheaper overall loan costs.
- Lenders May Tighten Standards: Lenders might raise criteria, requiring a higher credit score, a bigger down payment, or a lower debt-to-income ratio.
- Difficulty in Getting a Home Loan: It might become more challenging to secure a home loan during an economic downturn.
- Financial Risks: Economic downturns come with financial risks that could impact your ability to maintain mortgage payments.
- Potential Income Changes: If a recession leads to job loss or reduced income, keeping up with mortgage payments could become challenging.
- Floor on Pricing Decreases: Home prices may not drop as much as expected due to a floor on pricing decreases.
Will House Prices Go Down With Recession?
It's a common belief that home prices tend to drop during a recession, but the reality is more nuanced. While recessions often exert downward pressure on home prices, it's not a universal rule. Over the last five recessions, home prices experienced a decline in four out of five instances (between 1980 and 2008), usually at an average rate of approximately 5% each year the economy remained in a recession.
The reasons behind these price drops are often tied to economic uncertainty and reduced buyer demand. During a recession, the demand for homes typically slows down, causing a subsequent decrease in their values.
While it’s true that recessions can create opportunities to purchase homes at potentially lower prices, it’s not guaranteed. Waiting for a recession to buy a house may not be the best strategy as home prices could remain high regardless of a recession.
According to Forbes, the housing inflation storm that pushed buyers out of the market seems to be decelerating. Experts now forecast a 3% year-over-year increase in national home prices by the end of 2023.
Interestingly, during a recession, mortgage rates may also decrease. This reduction can make acquiring a mortgage or remortgage more affordable for potential buyers. Lower mortgage rates present an opportunity for buyers to invest in real estate at a more cost-effective rate, potentially mitigating the overall impact of the recession on the housing market.
How Much Did House Prices Drop in the Recession of 2008?
During the 2008 recession, one of the most significant economic downturns in recent history, house prices experienced a substantial decline. The exact extent of the drop varied across different regions and markets, but on a national scale in the United States:
1. Peak to Trough: Between the peak in 2007 and the trough in 2012, the overall house prices in the U.S. fell by approximately 30%. In the 2008 recession, U.S. home prices fell by 9.5% in 2008, to $197,100, compared to $217,900 in 2007. The median price for a U.S. home sold during the fourth quarter of 2008 fell to $180,100. The subprime mortgage crisis caused a dramatic fall in housing prices. The housing bubble burst and prices fell 27.4% from their peak in 2006 to their low point in 2012.
2. Foreclosures Impact: The recession triggered a significant rise in foreclosures, leading to an oversupply of homes in the market. This excess inventory further drove down home prices.
3. Regional Variations: The drop in house prices varied by location, with some regions experiencing even more substantial declines, while others were relatively less affected.
4. Long-term Impact: The effects of the 2008 recession on the housing market were profound and had a lasting impact, influencing real estate trends and policies for years to come.
In summary, the decision to buy a house is a significant one, and it’s essential to consider various factors before making a choice.
However, you should consider waiting to buy if:
- Interest rates are high and you think they might decrease.
- Your financial situation needs improvement, such as increasing your credit score or saving more for a down payment.
- The housing market in your area is volatile or experiencing a downward trend in prices.
- You are worried about a potential recession, especially if your main income source is susceptible to an economic downturn.
- Consider your long-term plans and objectives. If you anticipate moving in the near future or have other life changes on the horizon, waiting might be more pragmatic.
- Timing the market perfectly is challenging. Waiting too long could mean missing out on good opportunities, as predicting the precise start and end of a recession is notoriously difficult.