The inflation rate as of November 2022 is 8.202%, well above the long-term average of 3.26%. Mortgage rates are still rising, exceeding 7.44%, and there’s a good chance the Fed will increase lending rates by 50 to75 basis points in the December 14-15 FOMC meeting, and an additional 25 to 50 basis points in the January 31-Feb 2 2023 FOMC meeting. This could result in Mortgage rates close to 9% by February 2023.
All of these point to a intentional recession. If anything, TD securities think there’s a more than 50% chance the US will enter a recession within the next 18 months.
While a recession means people don’t have the money to purchase a home, it presents mouthwatering opportunities for a real estate buyer, as long as the buyer can maintain financial solvency through the 18 to 24 months of a recession. Keep reading to learn why buying real estate assets during a recession might be a good idea.
Purchasing Real Estate during a recession has some benefits, such as:
House prices usually fall dramatically during economic downturns. Such an economic environment means people can barely afford the bare essentials, so splashing hundreds of thousands of dollars on a home is out of the question. This has a trickle-down effect on the Multifamily real estate market and even other real estate asset classes.
A lack of interested purchasers can lead to prolonged selling times, so sellers may feel compelled to cut their asking prices to move the assets. Foreclosures also force homeowners to sell, increasing the supply of homes and further driving down prices.
While home prices have not dropped significantly as of August 2022, Moody’s Analytics forecasts that home prices in highly “overvalued” housing markets might fall by 15% to 20% should a recession hit, while nationwide home prices would decrease by roughly 5%.
During a typical recession, business stagnates, so the Fed’s go-to solution to spur the economy and get people to spend is lowering interest rates. That typically leads to more affordable mortgage rates, which is your cue to hit the market in search of a home. This Fed pivot will not occur until we are firmly entrenched in a recession, and consumer confidence has severely been impacted, often seem as a reduction in the hyper liquid stock market open futures.
The National Bureau of Economic Research (NBER) still has not called this a recession despite two consecutive depressed financial quarters, which explains why the interest rates are still high.
If the economy does tip into a recession, expect mortgage rates to plummet, but only after the stock market capitulates and the average investor is running for the exits. That would be the perfect time to get a mortgage and grab a house.
In 2020 and 2021, homes were flying off the shelf, some site-unseen. Homes found buyers in as little as one week. A depressed economy, however, means people don’t have purchasing power, so expect little competition for home listings.
The high mortgage rates and exorbitant home prices also mean supply will increase, so you will have plenty of homes to pick from, if you can afford it.
Here are some tips if you want to purchase a home during a recession:
Sure, property will generally be cheaper, but that doesn’t mean you can’t get a better deal. Scour the internet and visit local listings. You might net the bargain of the century and maximize profits if you decide to sell the home later.
Just because it’s your dream doesn’t mean you should compromise everything to get the deal over the line. If you find an asset that meets all your requirements but is too expensive, ask the seller to lower the price. If they can’t, walk away. There are plenty of gems like that waiting to be discovered. Take your time to negotiate.
First, you need a budget, a limit of what you can afford to purchase any property. That will act as a guide whenever you’re conflicted about how much you should spend.
That also means ensuring you have a good credit score to secure a mortgage, pay all the taxes, and have enough savings to stump up the down payment.
Yes, mortgage rates are lower than usual, but you can still get a better deal than most people. Considering mortgages involve vast sums of money, you’d be surprised how much money a few changes in decimal numbers will save you.
Go around looking at the deals mortgage providers offer to find one that suits you best. That would also be a good time to enlist a mortgage broker as they know the best places you can land a mortgage deal after considering your financial circumstances.
Hiring a real estate agent is a great way to expand your reach in the real estate market. Agents have access to more properties than you could find by yourself and know where to strike a deal. They can also provide valuable advice, offer guidance, and negotiate on your behalf.
Due to the market downturn, you should take advantage of all the rebates and real estate deals that come your way. Owners are under pressure to sell their properties as quickly as possible due to the drop in prices. Consult with your real estate agent to request concessions from the seller, but keep in mind the agents goal is to generate a commission, their incentive is to generate a sale.
One benefit of purchasing in a down market is obtaining a reasonable price. Don’t let your emotions get you into a bidding war, as that will mean spending more than you had anticipated. An excellent way to go about this is to set a budget and adhere to it.
As you’ve probably noticed, it is a down market, so properties aren’t moving fast. Therefore, you should approach a purchase knowing that you may not offload for a long time. It would be best if you reassessed your investment strategy.
If your strategy is flipping property, that may not work in a down market, its akin to catching a falling knife. It would help if you thought of long-term strategies, such as renting the property. That entails gauging the viability of the property as a rental unit before deciding to purchase.
Therefore, don’t spend your last dollar on a property hoping to get instant returns. Since you’ll be holding onto the property for some time, you should also ensure you have the finances to take care of maintenance and taxes.
For the right investor, purchasing real estate during a recession makes sense. While mortgage rates are forced up to control inflation and create unemployment, they typically fall during the recession; once unemployment skyrockets up and the stock market tanks. Further, there are a lot of listings to choose from as there’s little competition.
I recommend you use the stock market as an early indicator of economic duress, the housing market as a less volatile marker, and the multifamily market as a lagging indicator; unless of course, a black swan happens to swim by and we have major demographic changes.
If you have the financial liquidity, you can grab a once-in-a-lifetime deal, especially if you enlist the services of experienced guides who have navigated a few economic cycles. However, you may have to keep the asset for some time since it may be a prolonged down market.
By Gurpreet Singh Padda, MD, MBA