News outlets have been reporting on the impending recession for months. But how will it directly affect the real estate market? Here are some things to consider when considering real estate transactions during a downturn.
Decreases to Consider
An economic downturn, like a recession, can result in many things decreasing regarding the real estate market. However, not all decreases are bad, and some may even offer unique opportunities.
Some of the more common decreases to consider are:
Decreased Demand for Housing
First, a recession can result in a decreased demand for housing. If people lose their jobs, it will reduce consumer confidence and result in fewer people looking to buy homes. Even people who are doing well may be cautious during this time and less eager to purchase a home during a recession.
Decreased Property Values
Another significant issue is decreased property values. As the demand for housing lowers, property values also drop. Unfortunately, this can also decrease the homeowner’s net worth making it more difficult for them to access credit and sell their homes at a profit. Many homeowners who have owned their homes for years want to sell them at peak value and may be reluctant to sell their homes during a recession.
Decreased Sales Activity
When the demand drops and homeowners stop selling and looking for new homes, sales transactions slow down. During a recession, fewer people can afford new homes, and existing homeowners may decide not to sell since they can’t get what they want for their homes (decreased property values). All of this results in decreased sales activity.
Decreased Ability of Financing
During a recession, banks tend to tighten their lending standards, meaning people will find it harder to qualify for mortgages and get financing. During recessions, banks are more cautious and may use stricter lending policies, and people who typically qualify may not. Banks may change the requirements, like the debt-to-income ratio, that the buyer must meet to qualify for a mortgage.
Decreased New Construction
Another recession-related issue is a decrease in new construction projects. Builders may hold off on starting new construction projects during a recession because there aren’t enough buyers, and it’s harder for prospective buyers to obtain financing. It makes more sense for them to wait until the economy improves before building new homes.
Positives to Consider
Along with the decreases, there are also increases to consider when the economy takes a hit. Some of the more common things that may increase because of a recession include:
Increased Competition for Rental Property
A recession means lost jobs, which may result in homeowners losing their homes and renting apartments instead. With more people struggling to make ends meet, there can be a lot of competition for rental properties. Although this is good for landlords, it may not be great for those searching for affordable housing.
Increased Foreclosure Rates
Another unfortunate situation during a recession is increased foreclosure rates. When homeowners lose their jobs or struggle financially, they might find it impossible to keep up with their mortgage payments, and the bank can foreclose. Typically, a recession does result in increased foreclosure rates.
Increased Demand for Affordable Housing
More people tend to struggle financially during a recession which means they need to find more affordable housing options. They might need to sell their homes for a loss and move into apartments. This usually results in an increased demand for affordable housing and more competition for the same properties.
Increased Investment Opportunities
One positive in all the negatives is that a recession can produce increased investment opportunities for those who are positioned to benefit from them. Areas impacted by the recession will have lower property values, sometimes significantly lower than usual, making it an attractive time for investors to buy.
Increased Uncertainty
A recession can affect the real estate market in a wide variety of ways, both good and bad. For example, during a recession, job losses, decreased customer confidence, and reduced availability of financing all result in increased uncertainty for buyers, sellers, and investors.
There are no absolutes during a recession. Anything can happen, and the market may remain volatile until it’s over.
Should Homebuyers Purchase a Home During a Recession?
Buying property during a recession is an important decision and may be based on many factors. The buyer’s personal financial situation is critical to the equation. If they have a steady, consistent job and are able to qualify for the mortgage they need easily, and they are motivated to buy (because of relocation or unstable housing situation), then it may make sense to purchase during a recession. With lower property values, they could find deals that otherwise may not be available to them.
Homeowners and investors may be able to take advantage of foreclosure or short sales, but there may be other costs to consider.
The good news is that mortgage rates are typically lower during a recession because the demand is low, and the government lowers rates to stimulate the economy.
Anyone buying during a recession should carefully consider how much they can afford, especially if something changes in their financial situation down the road. It may be tempting to jump on lower prices, but you must consider the long-term commitment.
A recession might be a great time to purchase real estate, but there are risks involved with any real estate transaction. Be sure to rely on certified inspectors and do a thorough title search before putting down money on any property.
Where to Find Real Estate Guidance
Real estate transactions can quickly become complicated even during a healthy economy. Therefore, it’s essential to rely on proper guidance to ensure your interests are protected at all times and that you have covered all your bases before buying real estate.
Contact Spiritus Law for help with your next purchase, whether residential or commercial. We are an experienced group of legal professionals who specialize in the areas of hospitality and real estate law. During a recession, we can help guide your real estate transactions for the best possible outcome.
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