Should fear of the next recession keep you from buying a home?
Last month, some economists were predicting a likely recession by 2021. But now that the coronavirus is crimping consumer spending, closing businesses, halting wages and sending workers home, some economists say the economy has got to be in recession now.
Recessions are usually identified by viewing data that isn’t fully compiled, so by definition, this is a look back. Based on the economic effects of the covid-19 virus that are mounting daily, many economists believe that the view in this rear-view mirror won’t be pretty when we get further down the road and have a look.
For many, the lasting impact of the Great Recession of 2007-2009 has left memories of losing a home or watching one’s neighbors or parents lose theirs. This in itself may be enough to have you second-guessing a home purchase in uncertain economic times. But now that the effects of the coronavirus are besetting the economy more with each passing day, this fear is doubtless heightened for many.
Here’s what happened during the last recession
In the years preceding the Great Recession, subprime mortgages made home ownership accessible to almost anyone, including many who couldn’t afford it.
As a result, there was a boom in homeownership by buyers who had put little or no money down. As real estate prices declined dramatically, many homeowners quickly found themselves “underwater” on their mortgages: They owed more than the homes were worth.
Struggling to keep up with payments they couldn’t afford amid massive layoffs and a stock market crash, millions of Americans defaulted on their mortgages. An estimated 9.3 million homeowners lost their homes, many through foreclosure.
Could that happen again if the virus brings the economy to a standstill?
Since 2009, underwriting standards have toughened and regulations governing lenders are far stricter. And now, the coronavirus is pushing interest rates down–a trend that usually increases demand. Yet business interruptions and closings of whole industries are lowering earnings for many workers and laying off others, lessening their ability to buy homes. Doubtless, money saved for down payments will go toward paying rent and buying groceries.
Greg McBride, chief financial analyst at Bankrate, says that it’s important to take a long view. “Despite fear and uncertainty, investors should think to the future, beyond the economic pause and when business and life resumes normalcy. The short-term disruption is unprecedented, but the long-term viability of the economy is not,” he adds.
A home is not just an investment, but a place to live. And with super-low mortgage rates, and better deals to be negotiated with sellers, this may be a good time to buy.
Job security–at its lowest for individuals out of work, a category that’s growing daily–affects not only demand but the ability to qualify for a mortgage loan. So many buyers who would be looking at homes now are probably holding off, waiting to see what happens with their incomes.
It’s too early to tell what effect the coronavirus will have on housing and real estate. In China, the virus has had a severe impact, with home sales and home construction down 30 to 50 percent in the first two months of the year.
Pros of buying a home during a recession
For those who are confident in their future incomes despite the corona-addled economy–for example, those in business sectors where consumers are still spending money–this period of historically rock-bottom interest rates may be a great time to buy. Every day, it’s becoming more of a buyer’s market, though this could level off with the rate of infections, possibly in a few months. In the meantime, the economic impact could suppress demand, lowering prices.
Generally, for people struggling financially, selling their home might be a last option before facing foreclosure. Because of this, turnaround on a home purchase could be quick — and, potentially, at a good price for the buyer. “Most homeowners would rather trade their equity in their home to sell quickly than to go through foreclosure and ruin their credit for seven years,” says Shawn Breyer, owner of Breyer Home Buyers in Atlanta. “With this in mind, solving people’s problems allows you to get houses for a reduced amount of money during a recession.”
Cons of buying a home during a recession
You may have to wait a long time for appreciation on a home purchased during a recession. If you buy a short-sale or foreclosed home, you may get a deal but there are additional disadvantages:
Less room for negotiation
Jessica Whiffen, licensed realtor with Premier Sotheby’s International Realty in Naples, Florida, says buying during a recession can bring the opportunity to snag a great bargain — but warns that it also brings financial risks. One is less wiggle room with negotiation.
“You are not in a traditional negotiating situation, where the buyer is on one side of the table and the seller is on the other,” says Whiffen. “It is more like a triangle, in which the seller is the middle-man, and doesn’t have much say. You are essentially only negotiating with the bank.”
Whiffen recommends you do your research beforehand — comparing the price of the home to other recent sales in the neighborhood can be a good indicator of property values.
During a short-sale or foreclosure, Whiffen says most banks are selling properties “as-is,” meaning they are unlikely to offer additional credits or make repairs for problems that may arise during inspection.
“Very rarely will the financial institution who has sanctioned a short-sale or who is facilitating a foreclosure give you any help when it comes to materially defective items,” Whiffen says. “Buyers are always out there, properties are not.”
Harder time securing financing
When economic times are tough, it can be more difficult to obtain a mortgage. Lenders may have stricter requirements for approval, such as higher credit score requirements or larger down payments.
Find out how much home you can afford with Bankrate’s home affordability calculator.
Competing with investors
In declining markets, more investors look to purchase homes and use them as rental property, hoping to sell when prices recover. Breyer notes that it’s hard to compete with these investors because they usually pay in cash.
“Homeowners know that selling to someone who needs lender approval could take months while selling to an investor for cash could get them out of a property in weeks,” says Breyer. “Know that it’s not always about the money. Talk to the selling agent and see if you can offer any other terms that would make the sellers consider your offer over an investor.”
You might be thinking now could be an opportune moment to purchase a house and rent it for passive income. McBride warns that it won’t be easy.
Rentals can be “capital intensive,” meaning they require cash for transaction costs, down payment, taxes, insurance, upgrades, maintenance, repairs and allowing for the occasional vacancy. If you don’t have those funds on hand, it’ll be hard to maintain your investment.
Who benefits the most buying a home during a recession?
McBride notes that buying a home during a recession depends on how much risk you’re willing to take.
“It takes nerves of steel to sign up for the largest financial commitment you’ve ever had at a time when the economic outlook is bleak, unemployment is rising, and fear and pessimism are rampant,” says McBride.
Of course, those who work in industries that are most vulnerable to economic downtown should think twice before buying a home during a recession. Getting laid off and being unable to afford a monthly mortgage jeopardizes your financial future.
If you have the job security, patience, savings and overall financial health to weather weak economic times, don’t let the next recession (or fear of one) come between you and your housing needs.
With additional reporting by R.H. Bierck.