Economic conditions globally come in cycles, and the same happens in the real estate market. While there’s a season of plenty that’ll see most investors smiling to the bank, a time will come whereby housing prices will fall massively, leaving those that made investments in this industry ruing their losses.
So, what’s the root cause of a real estate collapse? Recession. Irrespective of how dreaded this situation might seem, it’s bound to happen at one point or the other. With this scenario likely, it’s crucial to arm yourself with some knowledge if this adverse event rears its ugly HEAD.
Due to the degree of uncertainty in this market, people who have invested (minor or significant) in the housing market ask — how will recession affect real estate investors. If your query is in these lines, you’ve come to the right SPOT.
This blog post looks closer at how an economic recession could impact the real estate market. Using past events as determinants, we’ll try to predict what happens if this adverse event occurs in 2022 and beyond. Stay tuned.
What Is the Housing Recession?
Before getting insight into ways a recession can affect the real estate market, it’s essential to understand the term — housing recession.
Housing recession usually stems from “speculations.” What does speculation entail? This activity occurs when investors buy houses to make huge profits from them when they make a sale in the future. Speculation creates high demand, invariably skyrocketing the prices of homes.
With more speculators joining in on the party, an ultimate crash is imminent. When there’s a downturn in the economy, those who took mortgages and loans will find it difficult to clear their debts as interest rates increase. To stay afloat, most investors will seek to sell their properties for lower rates, giving room for lower prices.
Although a housing recession can negatively impact a country regardless of its economic prowess, it’s vital to understand that these events are usually short-term, meaning that economic recovery is achievable within a short period. Nonetheless, select occurrences can make this recession form last for long periods.
That said, what precipitates a housing recession? Let’s get some perspective in the following lines.
Causes of Housing Recession
In the real estate market, information is everything. To expand your knowledge bank on what investment forms feature huge profits, attending real estate investing webinars might work the trick.
Still, it’s crucial to know the factors that characterize a housing recession. Identifying these caveats can hinder you from making similar mistakes when this scenario happens again.
The major causes of a housing recession are:
When the purchase value attached to a property is high, demand reduces, and investors must reduce prices since these properties won’t sell themselves.
Despite this price slash, demand remains constant as intending buyers are skeptical about taking on that piece of real estate.
- False Demand
Due to “speculation,” more and more investors seek out loans and mortgages to buy homes and sell them off at high prices. With this prospect accompanying lower mortgage rates, more people tend to make real estate purchases, leading to a faux sense of demand.
- Hardcore Economic Recession
When there’s an economic recession, the economy shuts off, resulting in hardship at all quarters. Consequently, the demand for housing decreases as people are more concerned about earning a living and meeting ends.
House Prices During the Great Recession
During its season of plenty, the US economy had no issues in meeting its varying needs. This period spanned for so many years, and most people felt that the possibility of a recession coming up was at the barest minimum. In 2007, however, disaster struck as the economy nose-dived, creating what most termed the “Great Recession.”
The result of this particular scenario was extreme, as millions of Americans lost their jobs and homes as the housing market ultimately collapsed.
Although the housing bubble exploded during the Great Recession, it’s crucial to understand that the real estate market’s ultimate crash was set in motion years earlier.
From 2000, house prices in the United States became high, and lending provisions that should’ve been otherwise stringent and rock-solid were loose. When the crisis became full-blown in 2007, numerous foreclosures and defaults resulted in the financial market crash.
The values attached to financial securities associated with subprime mortgages depreciated during this period. Subprime mortgages are terms issued by lenders to borrowers that they consider risky.
Since agents and buyers didn’t follow through with these caveats, things got to an all-time low, resulting in a final collapse. The subprime mortgage collapse left many Americans without homes. With economic stagnation the theme during this period, most people faced financial doom as the properties they purchased via mortgages had their values reduced significantly.
However, there was more peril to come as mortgage rates doubled. These scenarios put together marked a dramatic halt in homebuilding for the growing population. With fewer homes and high demands characterizing this period, property prices were at an all-time high.
Although the US government finally intervened to prevent further damage, the housing market bore most of the negatives associated with the Great Recession.
How Will Recession Affect the Housing Market?
According to econofact, eight out of ten recessions since World War II resulted from a downturn in the housing market. With this astonishing statistic, it’s clear for all to see that this sector has a significant say in what path an economy takes.
While we’ve seen what happened during the Great Recession, how will recession affect real estate investors and the housing market at large if it happened today?
Well, we’ve considered this question, and here’s how a recession can affect the current real estate market:
- Depreciated Real Estate Prices
As we’ve seen from the Great Recession, a recession happening now will likely result in reduced prices for homes. While this might seem great for people who want to purchase or rent houses for a lower price, a disparity between income and home values might see the recession worsen.
Looking at past events like the COVID-19 outbreak, we can see that most foreign investors have lost the zeal to conquer the US housing market. Nevertheless, with restrictions easing, there might be an uptick of investments on the horizon.
- High Demand for Rental Homes
During a recession, most people become anxious, and rightfully so. Due to uncertainty in the air, individuals who had intentions to purchase a home will have reservations due to the income flux. Consequently, rental homes will become the go-to housing medium during this period.
Regardless of the increased rental rates that would define this period, people will prefer these real estate assets due to their cost-effectiveness at the time.
- Rent Would Cost More
An offshoot from the previous point, a recession will see rental payments become higher than income. Irrespective of this troubling fact, residents in big cities should be spared from this increment as they’ll be policies in place to mitigate this act.
Despite the thoughtfulness of these policies, landlords will have reservations as the interest rates on loans and mortgages might skyrocket. Thus, it’ll be almost impossible to run the property as a profitable venture.
- Real Estate Returns
Investors are churning in their resources to growing regions in preparation for an impending recession. Why? This act is mainly due to the lower home prices prevalent in these regions. As cities grow, there’ll be certain perks to take advantage of, and it’s no surprise that investors are moving “ship” to these places.
When they’ve found their footing in the market, a recession happening will do little to uproot their investments because these areas are a “beehive” for solid investments.
Buying a House During a Full-blown Recession: Is This Advisable?
Since a recession is likely to depreciate the monetary values attached to a home, investing in multifamily properties or any real estate asset of your choice is excellent. Due to foreclosures and people struggling to pay off debt, you can get an amazing and budget-friendly deal in no TIME.
However, due to the varying circumstances entrenched in a recession, buyers’ standpoints might differ. Here, you have to consider your stance carefully as a wrong move can spell doom to your investing endeavors.
Because of this, we’ve decided to curate a list of pros and cons attached to buying a home during a recession:
Advantages of Purchasing a Home During Recession
Buying a home has its positives, including:
- Lower Prices
When there’s a full-blown recession, supply is higher than demand. Therefore, homes stay longer on listings.
To make some form of dividends from these properties, buyers usually place lower prices to attract prospective buyers.
Depending on your bargaining prowess, you could still seek lower prices and get a deal of a lifetime without doing anything EXTRA.
- Decreased Mortgage Rate
To reduce the brunt of a recession on citizens, the Federal Reserve makes it a point of duty to lower interest rates on mortgages. Albeit a stimulation policy, this results in banks reducing their rates too.
This action lessens mortgage rates also. Consequently, you can pay a lesser mortgage for a home that should’ve cost you more.
- Seller Concessions
As we’ve established, recessions are periods where sellers are uncertain. You can use their wavering stance to your advantage. For example, you can make them overlook miscellaneous fees like closing costs when you purchase a property.
Disadvantages of Purchasing a Home During a Recession
While it might seem as though buying homes during a recession is smooth sailing all through, there are inevitable clogs in the mix. Notable mentions include:
- Job Insecurity
During recessions, public and private companies laying off staff is standard. With the nagging effects attached, entities have to do all they can to stay afloat, and when it comes to doling out those “retrenchment” papers, they do so without thinking twice.
Although you have a secure job, nothing’s certain as you can lose your job anytime. After you purchase a home, you’ll have to make mortgage payments, and without your job, your home might be in line for foreclosure.
Resultantly, ensure that you’re in a position of job security before making that LEAP.
- Difficulty in Making Sales
If you’re hoping to sell your home to get a new one, fostering sales might be complex.
During recessions, demand is almost non-existent, and even if there’s a buyer ready to make the purchase, they’ll undervalue your property. With numerous underpriced real estate ventures available, your options are limited.
- Stringent Competition
Are you wondering how competition makes its way alongside an economic recession? Although there are lesser buyers in the market during this period, you might be hustling for properties alongside investment companies.
Since these entities are aware that properties are going for “half” their prices, they’d like to profit after the recession. Most times, you can’t beat these organizations as they have the financial backing to make purchases without hassles.
- Title Issues
When you’re buying a property from a seller deeply rooted in debt or a foreclosure, you might encounter title issues. Since these documents are essential in verifying a property’s authenticity, not getting them on time might prove catastrophic to your purchase.
How Investors Can Prepare for an Impending Real Estate Recession
If you fail to prepare, you prepare to fail. An economic recession is bound to occur at any time and as a thoughtful real estate investor, getting your acts right ahead of time is a MUST.
Here are some ways you can anchor your investing boat before the waves hit:
- Save Money
In a time of lack, your savings can help you pull through when a real estate recession hits hard. This action is vital as it keeps your real estate investments running smoothly.
Although there might be a clog or two in the mix, the ripple effects will be minimal.
- Build a Network
Never underestimate the power of NETWORKING. During a severe economic downturn, your network can make you stay afloat. Although engaging other real estate agents and wholesalers works, ensure that you’re a priority to them.
As you expand your network, you must also look into other markets. Diversity and networking go hand and hand. Going through a recession will be easier if you get these aspects right.
- Invest in Your Real Estate Properties
Investing in your real estate properties might sound strange for some. So, let’s say you add a bedroom to a 6-bedroom structure that you own. You’ll most likely get positive profit margins when you do this, as tenants will probably pay more for that extra.
Besides this perk, making these add-ons on your properties ensures that they stand out during a recession. Consequently, you’re sure of people paying rent regardless of the prevailing economic conditions.
How will recession affect real estate investors? Well, we hope that this article satisfied your inquiry. While we aren’t clairvoyants to give insights into what the future holds, the Great Recession of 2008 should provide us with that perspective of things to come.
Although recessions are never a good thing, going through the pointers above will make you engage this adverse event with your head held high. Since you’ll have to prepare for this scenario, making the right investments is necessary.