A handful of financial experts and economists predict the US is going into recession in 2022/23. In fact, more than 70% of economists believe a recession is about to hit. Over the past few months, the Federal Reserve made efforts to slow down the economy. They did so via two different interest rate hikes, but they have yet to bear any effect on inflation.
According to a survey of 49 US macroeconomists conducted by Financial Times, the recession will happen by the end of 2022 or start of 2023. What does this mean for the real estate market?
How Recessions Affect Real Estate Markets
Recessions result in unemployment, an increase in loan defaults, and stagnant household incomes. During a recession, it‘s common to see an increase in foreclosures, declining property values, and lower home sale volume. In fact, you may find a home staying on the market for longer periods than usual before they sell.
This is bad news for real estate brokers and the industry overall. However, it can create opportunities for real estate brokers and the entire industry. So, is buying a home in a recession a good idea?
Buying a Home in a recession. Good or Bad Idea?
Less Buying Competition
In a recession, it means there are fewer people with the means to buy a home. Depending on the type of house you desire and the neighborhood, you’ll have fewer people seeking properties that interest you. This means buyers have less urgency to buy a desirable property because they fear another person will pounce on it.
During a recession, you’ll have time to shop around and compare different properties as well as their prices. This will reduce the pressure of submitting a bid.
Lower Interest Rate
When inflation hits, the Federal Reserve takes steps to slow its progress. In May 2022, the Federal Reserve hiked interest rates by 0.75% in hopes of slowing inflation. The Federal Reserve Chairman Jerome Powell announced the interest rate hike following a Federal Open Market Committee Meeting.
In a recession, the Federal Reserve lowers its short-term interest rate. This helps to boost economic growth and encourage spending. Also, lower interest rates encourage investment as private lending offer loans such as Bridge, Ground Up Construction, Rental DSR and others.
Since a lower interest rate leads to a reduction in interest rates charged by banks and private lenders, then you can qualify for lower mortgage rates. With a mortgage, you can invest in real estate.
During a recession, supply is usually higher than demand. As such, homes stay longer on listings. To attract prospective buyers, real estate brokers lower the prices of listings. As a real estate investor, you can get a deal of a lifetime depending on your bargaining prowess. This is because sellers are willing to accept offers below their asking price. Not only that. They would like to avoid months of marketing listings as it results in losses.
You can purchase property and get a good deal during a recession. However, if you buy property from a seller with debt or foreclosure, you’ll encounter title issues. If you suspect the property that you are about to buy has title issues, do a search for the title. All recorded documents are usually filed at the clerk‘s office or county recorder.
Tight lending requirements does not mean you can‘t get a loan or mortgage. However, it‘s important to ensure your credit score is high before applying for any loan or mortgage. If you‘ve a high credit score and the ability to keep up with payments despite the economic uncertainty, then a recession is a good time to buy a home.