A recession does not equal a housing crisis. That’s the one thing that every homeowner today needs to know. Everywhere you look, experts are warning we could be heading toward a recession, and if true, an economic slowdown doesn’t mean homes will lose value.
What History Tells Us About the Relationship Between Inflation and Real Estate
The National Bureau of Economic Research (NBER) defines a recession as “A recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators. A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”
To help show that home prices don’t fall every time there’s a recession, take a look at the historical data. There have been six recessions in this country over the past four decades. Looking at the recessions going all the way back to the 1980s, home prices appreciated four times and depreciated only two times. So, historically, there’s proof that when the economy slows down, it doesn’t mean home values will fall or depreciate.
When home values depreciated in the early 1990s, home prices dropped by less than 2%. It happened again during the housing crisis in 2008 when home values declined by almost 20%. Most people vividly remember the housing crisis in 2008 and think if we were to fall into a recession, we’d repeat what happened then. However, this housing market isn’t a bubble that’s about to burst. The fundamentals are very different today than they were in 2008. So, we shouldn’t assume we’re heading down the same path.
We’re not in a recession in this country, but if one is coming, it doesn’t mean homes will lose value. History proves a recession doesn’t equal a housing crisis.
The Role of Interest Rates in Real Estate During a Recession
The Federal Reserve has confirmed its commitment to lower inflation. Historical data shows that during each recession since the early 1980s, mortgage rates have decreased. While history may not always repeat itself, an economic slowdown does not necessarily mean a negative impact on the housing market.
The role of interest rates in real estate during a recession is significant. Generally, when an economic slowdown occurs, the Federal Reserve lowers interest rates to encourage borrowing and stimulate the economy. This often leads to lower mortgage rates, which can make buying a home more affordable and attractive for potential homebuyers.
Lower interest rates can also encourage current homeowners to refinance their mortgages, which can reduce their monthly payments and free up cash flow. Additionally, lower interest rates can make it easier for businesses to borrow money, which can stimulate job growth and increase consumer spending.
Interest rates can also fluctuate and become more volatile. As the economy struggles, lenders may become more cautious and hesitant to lend money. This can lead to higher interest rates for borrowers. Additionally, if inflation becomes a concern, the Federal Reserve may raise interest rates to control inflation, which can make borrowing more expensive and slow down the economy further.
Overall, interest rates play a crucial role in real estate during a recession, and it’s important for homeowners, homebuyers, and real estate professionals to stay informed about changes in interest rates and how they can impact the housing market.
The Pros and Cons of Investing in Real Estate During a Recession
Investing in real estate during a recession can have both pros and cons. Here are some factors to consider when deciding whether it’s a good time to buy.
Pros
- Lower prices: During a recession, property values may decrease, making it a more affordable time to buy real estate.
- Less competition: Fewer people may be looking to buy during a recession, which could mean less competition and more negotiating power for buyers.
- Potential for higher returns: If the property is purchased at a low price during a recession, there is potential for higher returns when the market eventually recovers.
- Rental income: Real estate can provide a steady stream of rental income, which can help investors weather economic downturns.
Cons
- Uncertain market: During a recession, the real estate market can be unpredictable, making it harder to accurately gauge the value of a property.
- Financing difficulties: Lenders may be more hesitant to provide loans during a recession, making it harder to secure financing for a real estate purchase.
- Property value decline: While lower prices may make real estate more affordable during a recession, there is a risk that the property’s value could continue to decline.
- Increased maintenance costs: Older properties may require more maintenance during a recession, adding to the overall cost of owning real estate.
Investing in real estate during a recession can have potential benefits such as lower prices and higher returns. It also comes with risks, such as uncertain market conditions and financing difficulties. It’s important to carefully consider these factors and work with a trusted real estate professional before making any big decisions.
Is It a Good Time to Buy?
Despite the current news of record-breaking home prices, rising consumer costs, and supply chain constraints, you may still be wondering if you should buy a home in 2023 due to inflationary concerns. During a high inflation period, prices rise across the board. Although home prices are not immune from this increase, there are reasons why you shouldn’t let inflation deter you from buying a home in 2023.
Purchasing a home offers stability and security as it allows you to lock in your monthly mortgage payment for the foreseeable future. This means that as other prices rise, your monthly payment will remain consistent thanks to your fixed-rate mortgage. This offers peace of mind as the bulk of your housing costs is shielded from inflation. In contrast, renting does not offer the same protection from rising housing costs.
Furthermore, today’s mortgage interest rates are lower than they have been in decades, which helps counteract inflation by boosting your purchasing power and keeping your monthly payments down. This is especially important during an inflationary period as you want to protect yourself from the impact of inflation as much as possible.
A fixed housing cost is the best hedge against inflation. Don’t let inflation stop you from buying a home this year. If you’re unsure of where to start, connect with an expert who can provide you with advice and help you throughout the home buying process.