Thursday, April 2, 2020 / by Hardy Real Estate Group
Should You Buy a Home if a Recession Hits?
Should You Buy a Home if a Recession Hits?
Between the coronavirus pandemic, the shutdown of nonessential businesses and a plummeting stock market, buyers and sellers wonder: Are we headed for a recession? Anyone who had a goal of buying in 2020 would probably like to know if now is a good time to buy before committing to a major, long-term purchase. Similarly, anyone planning to sell their home in 2020 would like to know; should they sell now or weather the storm. Then the question is, if they wait, will their home value be affected?
To set the stage for the below information, it is important to note that a Recession is not necessarily a positive for any industry. Yes, some can weather a recession better than others, such as essential goods and services as opposed to businesses that are reliant on consumer discretionary income. With that said, real estate tends to fall into the latter; people will always need to buy, sell, their homes. Whether an economic recession or an economic boom, people will always need a place to live.
Now lets get into it.
The Backdrop is Vastly Different than 2008
The current economic environment and fundamentals look much different than they did in 2008. The Great Recession of 2008 was the culmination of many weak spots in the economy that was fueled by the Housing Crisis. Lenders originated mortgages to people that did not qualify, severely driving up home prices across the nations, and which ultimately resulted in many buyers foreclosing on their homes because they did not have any skin in the game.
Because banking and real estate/construction companies were at the core of those hardest hit, the massive layoffs these companies faced trickled negatively throughout the entire economy.
Today, the current crisis is not a result of economic weakness, but is rather the result of an external factor on the economy. In fact, after the 2008 crisis, laws were passed that cracked down on Banks' balance sheet requirements as well as lending practices for Mortgage companies. Additionally, consumer sentiment and spending looks quite different - the Great Recession spooked many households, and as a result, household debt has been at historic levels since.
Will Home Prices Drop?
Timing the market is nearly impossible whether you are talking about stocks or real estate. It is likely that home prices may drop slightly to a "level off" range, but a recession does not always mean a sharp decline in prices. The true impact will depend on the severity and duration of the economic downturn.
A chart published by the Federal Reserve Bank of St. Louis shows home price data as provided by S&P Down Jones Indices. Note that prices moderately declined during the 90-91 recession, and then rebounded. During the recession of 2001, home prices did not decline. Remember -- the cause of this downturn was the burst of the dot-com bubble.
Source: Fed Reserve Bank of St Louis
We do see a decline that lasted for a moderate timeframe during the Great Recession of 2008-2009, however, housing was a large underlying factor in the breakdown of economic activity during the Great Recession so this does not come as a surprise. Additionally, you see that home prices started to decline before the recession hit during 2008-2009.
Not All Housing Markets are the Same
The Media often refers to the "US Housing Market", implying that there is just one housing market across the entire nation. We would recommend treating housing markets as micro markets. Pricing and activity can vary from neighborhood to neighborhood even within the same city!
It is important to understand the micro locality of housing markets to set expectations that, when thinking about a national median home price, this could be influenced by local markets that are impacted more severely during a recession versus some local markets that may so an increase in prices, although at a much slower pace than they would if not undergoing a recession.
What Should You Consider for Buying a Home - Especially Now?
1. Employment Stability: Sometimes this can be hard to assess during times of increased uncertainty, but it is important to gauge your gut feeling as it relates to your employment. Do you feel confident that your household is in a situation of income stability as you are considering making one of the largest financial commits that you will make in your life? This is an important question to ask yourself if you are considering purchasing your first home during a recession.
2. Savings: If you have financial savings in the bank, you are in a very strong position during a recession. Your savings will directly influence your ability to make a down payment (depending on the loan, 20%, 10%, or 5% + closing costs) - as well as provide a cushion in a time where job certainty may be slightly less. Savings also brings us to number 3.
3. Mortgage Qualification: Getting pre-approved for a mortgage is a first step no matter the economic condition, but now, it is more important than ever to get pre-approved! If you have substantial savings, this will help you get pre-approved at a favorable rate. Additionally, pre-approval ensures you know what you can afford and that is the most important factor. Now is not that time to be buying something you cannot afford. It is always a good time to buy a home, unless it is outside your means. Ensure you are considering purchases that are within your budget, allowing you additional cash flow outside your monthly mortgage payment for everyday expenses. Your mortgage lender will consider your debt to income ratio when qualifying you, and help you take into consideration all of your expenses when determining what price range you are comfortable with.
4. Time Horizon: Think about your time horizon for this purchase - how long do you plan to stay in the home? This brings us back to the point of timing the market. If you plan to stay in the home for many years, which is often the case, you may actually stand to benefit from buying during a recession. There are likely bargains to be had in the market during a recession should prices dip. If you plan on staying put for a longer time horizon, we see that housing tends to fare well over the long term.
What Should You Consider for Selling your Home - Especially Now?
1. Home Prices: During a recession, home prices may drop or at least not go up too much. Should you wait? Again, this is not going to be a housing recession, another argument against waiting is that housing inventory still remains low.
2. Pricing & Staging: Pricing your home accurately is the most important factor. Don’t chase the market, position your home to be attractive for buyers to hopefully get multiple offers and drive the price up. Consult with your Realtor to come up with a pricing strategy. The Hardy Real Estate Group has a proven track record for this. Second more important factor is presentation. If your home is staged (clean and decluttered) it will present best and appeal to more buyers who will envision everything about your home being the home of their dreams!
3. Exposure: In the virtual world, the way the real estate industry is operating, it is still possible to get your home listed on the MLS and syndicated throughout all major real estate websites per usual. Furthermore, you can showcase your home through a video walkthrough during this time.
4. Interest rates remain at an all-time low: Interest rates are still very low, the prime rate was 5.5% this time last year and today it is 3.25% this gives buyers more purchasing power to qualify for a home. If your home is active on the market, you could be that match!
**Sources included for this blog: Realtor.com by Erica Sweeney, Yahoo Finance by Devon Thorsby & The Victoria Shtainer Team