With the United States and Global economies on the brink of Recession, many folks are beginning to wonder - is now a good time to buy a home, or should I sell my home now or weather the storm?
To preface the below, it is important to set the expectation that a Recession is not necessarily a positive for any sector of the market. Yes, some sectors can whether a recession better than others, namely essential goods and services as opposed to those businesses that are reliant on consumer discretionary income. With that said, real estate tends to all into the former - people will always need to buy, sell, or rent their homes. Whether an economic recession or an economic boom, people will always need a place to live.
The Backdrop is Vastly Different than 2008
The current economic environment and fundamentals look much different than they did in 2008. The Great Recession of 2008 was the culmination of many weak spots in the economy that was fueled by the Housing Crisis. Lenders originated mortgages to people that did not qualify, severely driving up home prices across the nations, and which ultimately resulted in many buyers foreclosing on their homes because they did not have any skin in the game.
Because banking and real estate/construction companies were at the core of those hardest hit, the massive layoffs these companies faced trickled negatively throughout the entire economy.
Today, the current crisis is not a result of economic weakness, but is rather the result of an external factor on the economy. In fact, after the 2008 crisis, laws were passed that cracked down on Banks' balance sheet requirements as well as lending practices for Mortgage companies. Additionally, consumer sentiment and spending looks quite different - the Great Recession spooked many households, and as a result, household debt has been at historic levels since.
Will Home Prices Drop?
Timing the market is nearly impossible whether you are talking about stocks or real estate. It is likely that home prices may drop slightly to a "level off" range, but a recession does not always mean a sharp decline in prices. The true impact will depend on the severity and duration of the economic downtown.
A chart published by the Federal Reserve Bank of St. Louis shows home price data as provided by S&P Down Jones Indices. Note that prices moderately declined during the 90-91 recession, and then rebounded. During the recession of 2001, home prices did not decline. Remember -- the cause of this downturn was the burst of the dot-com bubble.
Source: Fed Reserve Bank of St Louis
We do see a decline that lasted for a moderate timeframe during the Great Recession of 2008-2009, however, housing was a large underlying factor in the breakdown of economic activity during the Great Recession so this does not come as a surprise. Additionally, you see that home prices started to decline before the recession hit during 2008-2009.
Manhattan Luxury home prices have been in a correction phase for ~2 year as the market has been adjusting from lofty asking prices from 2014-2016.
Not All Housing Markets are the Same
The Media often refers to the "US Housing Market", implying that there is just one housing market across the entire nation. We would recommend treating housing markets as micro markets, sometimes, like in the instance of New York City, there are even hyper-local markets. Pricing and activity can vary from neighborhood to neighborhood even within the same city!
It is important to understand the micro locality of housing markets to set expectations that, when thinking about a national media home price, this could be influenced by local markets that are impacted more severely during a recession versus some local markets that may so an increase in prices, although at a much slower pass than would be absent a recession
What Should I Consider for Buying a Home - Especially Now?
1. Employment Stability: Sometimes this can be hard to assess during times of increased uncertainty, but it is important to gauge your gut feeling as it relates to your employment. Do you feel confident that your household is in a situation of income stability as you are considering making one of the largest financial commits that you will make in your life? This is an important question to ask yourself if you are considering purchasing your first home during a recession.
2. Savings: If you have financial savings in the bank, you are in a very strong position during a recession. Your savings will directly influence your ability to make a down payment - recommended at a minimum of 20% - as well as provide a cushion in a time where job certainty my be slightly less. Savings also brings us to number 2.
3. Mortgage Qualification: Getting pre-approved for a mortgage is a first step no matter the economic condition, but now, it is more important than ever to get pre-approved! If you have substantial savings, this will help you get pre-approved at a favorable rate. Some lenders may impose stricter requirements during a recession, so having sizable savings will only help you. Additionally, pre-approval ensures you know what you can afford and that is the most important piece. Now is now that time to be buying something you cannot afford. It is always a good time to buy a home, unless you cannot afford.
Ensure you are considering purchases that are within your budget, allowing you additional cashflow outside your monthly mortgage payment for everyday expenses.
4. Time Horizon: Think about your time horizon for this purchase - how long do you plan to stay in the home? This brings us back to the point of timing the market. If you plan to stay in the home for many years, which is often the case, you may actually stand to benefit from buying during a recession.
There are likely bargains to be had in the market during a recession should prices dip. If you plan on staying put for a longer time horizon, we see that housing tends to fair well over the longterm.