Real Estate Trends: Should You Buy A House In A Recession? Pros And Cons

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Key takeaways

  • We may not currently be in a recession, but we are experiencing some atypical circumstances in our economy, especially the housing market.
  • There are several reasons to consider buying a home during recessions – the two main reasons are less competition and lower prices.
  • There are also several potential drawbacks, like sky-high interest rates, a floor on pricing decreases and potential income changes if the U.S. does officially slide into a recession.

When we talk about personal finance, we often like to think in blanket rules. We like these mental shortcuts and standardized answers because they present seemingly simple solutions.

But in reality, a rule of thumb can be wrong a large percentage of the time. For example, you can’t answer the question, ‘Should you buy a house during a recession?’ with a clearcut yes or no. So much of the answer is highly variable depending on your location, job security and what happens in the near future, which is something no one can accurately predict.

That said, there are some helpful ways to think about whether buying a home during a recession is right for you, given your unique circumstances.

Are we in a recession?

As of yet, the National Bureau of Economic Research (NBER) has not announced a recession, though they typically wait until long after the fact to declare the start and end dates of such economic events.

We do know that the NBER looks at the following factors in concert to determine if the economy is in a bad enough spot to officially declare a recession:

  • Unemployment
  • Non-farm jobs data
  • Industrial price index (IPI)
  • Retail sales
  • Real personal income less transfers (PILT)
  • GDP

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While GDP was down in Q1 and Q2 of 2022, it went back up during Q3 2022. Unemployment numbers are officially back down to pre-pandemic levels, sitting at 3.7% as of November 2022. November’s retail sales numbers revealed a 0.6% month-over-month decrease, but they were up 6.5% year over year. While the Industrial Production Index has stalled since April 2022, it hasn’t taken a nosedive.

None of the numbers look all that bad, but since inflation is high and we’re still dealing with strange economic circumstances brought on by the pandemic and geopolitical conflict, a lot of people still feel like there’s something off with the economy – so much so that we’re pulling out all variety of recessionary monikers like ‘white collar recession,’ ‘Patagonia vest recession,’ and now, ‘Richcession.’

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Pros of buying a house during a recession

Some of the pros of buying a house during the coming months, whether we get the recession label or not, include:

  • Potential decrease in home prices.
  • Lower likelihood of getting into a bidding war.
  • Ability to refinance in the future with lower interest rates.

Home prices may decrease

The housing market was in an unsustainable rally between December 2019 and June 2022, with home prices rising by 45%. Such a huge increase in prices over such a short period was unprecedented.

Whether or not we’re in a recession currently, we have started to see home prices decrease. The 2.67% drop in home values nationally between July and October 2022 was one of the largest corrections since WWII. Some markets (notably those in large cities in the West that lost residents to remote work) have seen price drops as large as 5.4%.

These cities aren’t the only places where declines are expected, though. There may be even larger declines in so-called ‘bubble boomtowns.’ When tech workers relocated, these are the locales where they settled.

Places like Morristown, Tennessee; Muskegon, Michigan; and Pocatello, Idaho are all projected to experience price drops of more than 20% over the next year if a full-blown recession does indeed manifest, according to Moody’s.

Not all markets will experience losses, but if you’re house hunting in an area that does, buying over the next year could mean a lower sticker price.

You’re less likely to get into a bidding war

Madness ensued during the pandemic housing craze. Not only were buyers getting into outrageous bidding wars, but they were also forgoing smart buying practices, like demanding an inspection before purchase.

Luckily for buyers, these bidding wars have cooled. That doesn’t just mean that you’re less likely to pay above-market prices for a home. It also means you can make informed decisions, relying on inspections to alert you of any potential issues with the property before you purchase.

You can refinance in the future

Rates right now are fairly high. While the national average on a 30-year, fixed-rate mortgage has fallen back below 7% (it’s 6.47% as of Dec. 30, 2022) this number is still far higher than the mortgage interest rates we saw at the beginning of 2022, prior to the Fed’s rate hikes that started in March.

However, we can expect these rates to go back down if the Fed is successful in using them to lower inflation. The Fed has indicated that it intends to raise rates throughout 2023, but after this, there may be the potential to refinance at lower rates.

Cons of buying a house during a recession

There are some potential cons of purchasing a home at the current moment, too. They include:

  • High current mortgage interest rates
  • A floor on price decreases
  • Inventory is slim currently and during recessions generally
  • Lack of job/income security, especially if you work in the tech sector

A recession doesn’t automatically mean lower interest rates

If we’re in a recession right now, we’re experiencing one where rates are higher than they were previously. Rising interest rates are a major contributor to the cooling of the housing market. Because inflation is still so high, we’re not seeing the lower interest rates that typically come alongside a traditional recession.

The housing market currently has a floor

Home prices are anticipated to decrease over the next year, but there is a floor. Most economists are not predicting a 2008-style crash. A large reason for this is that there’s simply not enough affordable inventory. The issue isn’t that Americans don’t want to buy homes. The issue is that they cannot afford to do so.

That means once prices come down far enough, there will still be demand. While this is good news for current homeowners, it limits how good of a deal you’ll be able to find as a prospective buyer. It’s unlikely that you’ll find inventory at pre-pandemic prices, even with the current downward trend in pricing.

Inventory may be slimmer during a recession

During a recession, current homeowners are less likely to list. They’re watching these housing trends just as much as buyers, and many may wait to put their home on the market until there are more favorable conditions.

We’ve already seen this scenario start to play out over the past several months.

Your income situation is more likely to change during a recession

One of the key indicators of a recession is unemployment numbers. During a recession, you’re more likely to lose your job, which would make it more difficult to keep up on a mortgage. You might not want to lock yourself into a 30-year financial commitment under such circumstances.

Right now, we’re just not seeing unemployment numbers that would indicate a recession. In the jobs market as a whole, there are 1.7 jobs open for every unemployed individual.

But if you work in certain sectors, like tech, you’re more likely to be worried about holding onto your job. While this sector only makes up 2% of the American job market, if you work for a tech-based company, you have more of a reason to worry about your job security in the near future.

The fact that this sector is experiencing mass layoffs could further compound the disproportionate slide in pricing we see in Silicon Valley and bubble boomtowns.

The bottom line

If we’re in a recession, it’s an odd one. The traditional rules don’t seem to apply to the current, unique market circumstances.

Whether or not it’s a good time to buy a home is going to be highly variable, depending on which market you’re shopping, your willingness to sign on to higher rates in the hopes of refinancing in the future, and your short-term employment outlook.

While most Americans hold the vast majority of their wealth in home equity, home ownership isn’t the only way to secure your family’s financial future. You can also invest in the stock market using one of Q.ai’s Investment Kits powered by artificial intelligence, and hedging against these strange economic circumstances with Portfolio Protection. This is also a way to keep your savings for a down payment working while you search for the right deal – this also keeps your money liquid so you can move quickly when the time comes.

Download Q.ai today for access to AI-powered investment strategies.