Key takeaways

  • During a traditional recession, mortgage rates typically drop.
  • Home prices can drop as well, with fewer qualified buyers and less competition for homes.
  • However, there are still plenty of risks during any economic downturn, and today's high-rate climate is not exactly traditional. Recession buyers will need a high credit score, strong finances and stable income.

In 2022, as inflation grew and gross domestic product declined, many feared that the country was headed toward a recession. In response to these conditions, the Federal Reserve has raised interest rates dramatically — primarily to combat inflation, which has in fact come down significantly. But Fed rate hikes affect other segments of the economy as well, including the housing market.

Interest rates are not directly tied to mortgage rates, but typically, as the one increases, so does the other. The result of pricier mortgages is a slowing housing market, with fewer buyers.

A recession typically leads to a reduced level of real estate activity, as fewer people are willing or able to buy. — Greg McBride, CFA, Bankrate chief financial analyst

“A recession typically leads to a reduced level of real estate activity, as fewer people are willing or able to buy,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “But this won’t necessarily lead to lower home prices if the supply of homes available for sale is very low.”

If you’re hoping to buy a home, are these conditions beneficial, or do they create even more challenges? Here’s everything you need to know about buying a house during a recession.

What is a recession?

There has been considerable debate over the definition of the term recently. By one very simple definition, a recession is when an economy experiences two consecutive quarters of negative growth — meaning gross domestic product shrinks for two quarters in a row. That did, in fact, happen in 2022. But most experts argue that a true recession requires more than just one indicator.

Other factors, including the rate of unemployment, income, consumer spending, retail sales and industrial production all factor into determining whether or not there is a recession. The official call is made by the National Bureau of Economic Research’s Business Cycle Dating Committee. That group takes into account many different factors, including revised GDP data that becomes available months after the initial data is released, to make an official determination.

Are we in a recession now?

While the country did experience two straight quarters of negative economic growth in Q1 and Q2 of 2022, there was positive growth in the second half of the year, and that metric is just an unofficial rule of thumb anyway. The better question might be not whether we are in a recession now, but whether one is looming. Bankrate’s most recent Economic Indicator survey reports a 59 percent chance of entering a recession by July 2024. However, as of August 2023, the National Bureau of Economic Research has not declared one.

The housing market in a recession

Economic recessions — and the response to them by the Federal Reserve — can affect the housing market in a number of ways.

During a traditional recession, the Fed will usually lower interest rates. This creates an incentive for people to spend money and stimulate the economy. It also typically leads to more affordable mortgage rates, which leads to more opportunity for homebuyers.

But the current market has been seeing interest rates rise instead of fall, thanks to the Fed’s ongoing efforts to slow inflation. Rising rates typically increase the cost of getting a mortgage to purchase a house. This, in turn, lowers the demand for homes in the market.

The buyers who remain in the market during times of uncertainty like this often change — or at least change what they are looking for. They may find themselves in the market for a different type of home than they would be otherwise.

“There is a direct correlation between how much home a borrower can afford and the prevailing rates,” says H. Jack Miller, president of Gelt Financial and strategic financing advisor at Real Estate Bees. “Most people are buying as much home as they can afford.”

Will house prices go down in a recession?

While the cost of financing a home increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.

Decreased demand and fewer buyers mean that fewer people are competing for the same inventory of homes. When that competition dries up, sellers lose the upper hand they enjoy in a roaring seller’s market like we’ve seen in recent years. They will likely have to settle for less than their initial asking price — or at least less than they might have gotten in a more competitive market. And while that’s bad news for sellers, it can be good news for hopeful homebuyers.

Buying a house during a recession

Recessions can often push buyers out of the market, but that’s not necessarily because it is a bad time to buy. In fact, if you can afford to, Miller argues a recession can be a good time to buy a home. “Some people hold off on buying when this happens, but I think this is a mistake,” he says. “When rates go up and demand slows, buyers can usually get a better deal on the home they want.” You can always refinance when rates go back down again.

“Periods of very low mortgage rates that coincided with a weak economy saw a housing market that was comatose, because many people won’t buy a home when the economy is in bad shape,” says McBride. “But this has also provided an opportunity for better deals for those that were willing to buy.”

With all of that in mind, let’s look at some of the major upsides and disadvantages to buying during a recession.

Pros

  • Less competition: A recession often puts people in a difficult financial position, leaving them unable to afford a new home. This results in less competition within the market for those who can still afford it.
  • Lower prices: With fewer buyers, home sellers will likely no longer see multiple offers or bidding wars for their properties. This can lead to lower home prices.
  • Lower rates: During a recession, the Federal Reserve will often lower interest rates to stimulate the economy, which can result in more favorable rates for borrowers getting mortgage loans.

Cons

  • Stricter lending requirements: To protect their business during a recession, lenders may institute stricter requirements on mortgages to decrease the possibility of a borrower being unable to fulfill a loan.
  • Fewer options available: With less competition and lower prices, some sellers will take their home off the market or opt to wait it out, leaving less available inventory for buyers to choose from.
  • Economic uncertainty: Typically, many people lose their jobs during a recession, and other conditions may cause people’s finances to be less than stable as well. Liquidity can be important during a period of economic instability, and having your cash tied up in real estate may not be ideal.

Next steps

Buying a home during a recession can sometimes be a good idea — but only for people who are lucky enough to remain financially stable. If you’re thinking about buying during an economic downturn, be sure to enlist the help of an experienced local real estate agent. Not only do agents know their markets well, they also know how to get you the best deal in any given situation, including a recession.

FAQs

  • It can be. Recessions put many people in difficult financial circumstances, meaning they are less able to afford a new home and more likely to wait it out until conditions improve. This decreased demand means less competition for homes on the market, which in turn means sellers who are more open to lowering their prices.
  • Experts predict that, while the housing market is certainly cooling off, there will not be a housing crash. There are five main reasons why: low inventory levels of available houses for sale, a lack of new-construction homebuilding, strong buyer demand among millennials and other demographic groups, strict lending standards and low foreclosure rates. If any of these factors were to be reversed, that could indicate a housing recession.
  • A recession often leaves people in belt-tightening mode at the least, and in dire financial straits at worst. This is bad for both parties, as buyers might not be able to afford the purchase anymore, and sellers might not be able to fetch the price they’re hoping for, or even find a buyer at all. But overall, the market would favor buyers — at least, those with stable enough finances to remain in the market for a home. Fewer qualified buyers means less demand for the houses available, which typically leads to lower prices.