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Rates & Affordability

Is a Recession a Good Time to Buy a House?

Economic recessions typically bring low interest rates and create a buyer's market for single-family homes. As long as you're secure about your ability to cover your mortgage payments, a downturn can be an opportune time to buy a home.

What Are the Signs of a Recession?

The federal National Bureau of Economic Research (NBER), the recognized authority on recessions in the U.S., declared that the country entered a recession in February 2020. The NBER considers several economic indicators when making its determinations, including industrial production, employment rate, gross domestic product (GDP) growth and personal income. One common definition of recession is a decline in GDP that continues for two consecutive quarters.

In its announcement of the 2020 recession, the NBER bureau cited the public health crisis over the COVID-19 pandemic as the cause, rather than fundamental financial factors seen in past recessions.

How Do Recessions Affect Real Estate Markets?

Historically, a recession tends to result in things such as lower industrial output, higher unemployment, lower consumer spending, increases in loan defaults and bankruptcies, and stagnant household incomes.

They also commonly affect the real estate market. During a recession, you might expect to see increases in rates of foreclosure, flat or even declining property values, lower home-sale volume and houses for sale staying on the market for longer periods of time before they sell.

While this is generally bad news for real estate professionals and the industry overall, it can create opportunities for buyers who are able to convince mortgage lenders they can afford to keep up with their loan payments despite a slumping economy.

Benefits of Buying a House During a Recession

Factors that make homebuying advantageous during a recession include:

  • Lower interest rates: In response to reduced spending and slowing economic growth, the Federal Reserve historically exercises its power to lower its benchmark short-term interest rate to encourage investment and increase the availability of credit for individuals and companies. A lower Fed interest rate typically leads to a reduction in the prime interest rate banks charge when lending money to one another, which in turn leads to lower interest charges on commercial and private loans, including home mortgages. Lower mortgage rates mean a lower total cost over the life of a home purchase.
  • Less buying competition: Economic downturns typically mean fewer people have the means to buy a first home or upgrade to a larger one. Depending on where you're shopping for a home and the type of house you desire, that may mean you'll have fewer rivals seeking the properties that interest you. A market with fewer buyers can mean less urgency to pounce on a desirable property immediately for fear another buyer will get it before you can submit an offer. It can give you more time to shop around and compare properties, and it may also reduce pressure to submit a bid that exceeds the asking price to make your offer stand out from those of rival buyers.
  • Lower home prices: In accordance with the law of supply and demand, fewer buyers might cause a home seller to lower their price to make their property more appealing. Fewer buyers tends to mean longer selling cycles, which isn't ideal for those looking to sell in a hurry for financial reasons or because they have opportunity elsewhere. These sellers may lower their sales price or be willing to accept offers below their asking price if it allows them to avoid months of marketing, and open houses.

Challenges When Buying a Home During a Recession

  • Potential difficulty selling your current home: If you need to sell your current house in order to buy a new one, the pricing trends that benefit you as a buyer may work against you as a seller. Depending on your local housing market, you may need to be prepared for lowball bids or longer selling cycles. Working with an experienced real estate professional can be helpful when pricing your home to sell as well as when submitting purchase offers on a new house. If selling now sounds unappealing, consider keeping your current house and renting it out (as long as you have funds for a down payment on a new home). Turning it into a rental property could spare you having to sell in a slow market and provide you with an additional income stream that lenders may appreciate. (Be careful, though, since rent delinquencies tend to increase during recessions.)
  • Tighter lending requirements: Rising unemployment and overall lower household income often accompany recessions, and that typically means more borrowers have difficulty covering their debts. Lenders, in turn, often respond with greater caution about issuing new loans. They may give greater scrutiny to loan applications, increase the minimum credit scores required to qualify for loans, and increase down payment requirements on certain loans, including mortgages.

The Importance of Good Credit in a Recession

Lenders' tendency to tighten lending requirements in a recession doesn't mean you can't get a mortgage, but it makes it more important than ever to make your credit profile the best it can be before applying for one—or for any other kind of loan or credit.

Before you apply for a mortgage, and ideally six to 12 months ahead of time, review your credit report and check your credit score to know where you stand as a loan applicant.

If you see any inaccuracies or fraud in your credit report, use the dispute process to get them corrected.

Consider taking additional steps to tidy up your credit and give your credit score a boost.

Additional Considerations That Could Affect Your Home Purchase

While credit scores and credit history are always important yardsticks when lenders evaluate loan applications, a recession may prompt some mortgage issuers to give extra weight to other factors that contribute to your ability to repay a loan, including:

  • Employment status and history: While any job is potentially threatened by a prolonged economic downturn, loan applicants who have been with the same employer for a long time may be viewed more favorably than recent hires or those who are currently unemployed.
  • Savings and other assets: Amid the unpredictable stress of a recession, lenders will be looking for borrowers with the resilience to handle extended periods of reduced income. They may therefore favor borrowers with enough financial reserves to keep up with their mortgage payments even if they are unemployed for several months at a time.
  • Multiple income sources: Loan applicants with multiple sources of income may be seen as more stable than those who rely on a single salary and employer. Two-income couples applying jointly for a loan (especially one that could potentially be covered by either applicant individually) may be seen as more resilient, and alternative income sources from side businesses, investment properties, trusts or other sources could also reassure lenders.

If you can show a lender that you've got a strong credit history and the financial resilience to keep up with mortgage payments amid economic uncertainty, a recession could be an excellent time to buy a house.

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