However, it’s not always clear what to expect. For example, recessions often result in lower home prices, which is great for homebuyers—until you factor in job uncertainty and tightening lender restrictions. Knowing what could happen during the next recession can help you prepare to weather the storm.
Recessions Impact All Industries
There isn’t one standardized definition of a recession. Rather, it’s more of a phenomenon that—by the time we’re in the midst of one—most experts can agree that we’re in a period of a sustained decline in economic activity. The National Bureau of Economic Research defines recessions as a period of widespread economic decline that lasts for more than a few months. The exact measurements of “economic decline” vary, but researchers often use metrics such as the nationwide unemployment rate and income. These factors radiate and affect the rest of the entire economy, such as the hospitality industry, government contracts, health care, and even real estate.
Why House Prices Usually Fall During Recessions
House prices don’t always fall during a recession, but they do drop more often than not. According to the Joint Center for Housing Studies at Harvard University, housing prices dropped in four out of five recessions that have occured since 1980. Across all of those recessions, the average house price dip was 5% for each year the economy remained down. In some cases, that drop was huge: In the Great Recession, the average home price dropped by nearly 13%.
Tightening Lender Restrictions
It’s more common for people to lose their jobs in a recession, and that can put pressure on your ability to repay a mortgage. That’s why during a recession, most lenders will tighten their requirements to get a mortgage.
Less Competition Among Homebuyers
When times are tough, most people tend to shy away from making big financial commitments like a 30-year mortgage costing hundreds or thousands of dollars a month. The flow of homebuyers doesn’t shut off completely (not everyone is affected in a recession), but it does slow down to more of a trickle. From 2005 to 2008, for example, sales of single-family homes dropped by 30%. According to the law of supply and demand, when there’s less demand for a product, prices will drop.
Rent Costs Often Remain High During Recessions
In most recessions, rental costs do the opposite of home purchase costs: They tend to stay high or rise, rather than decline. Because people’s incomes tend to shrink during a recession, your current rental costs could take a bigger bite out of your paycheck. Here’s why.
Fewer People Interested in Buying
Fewer people buy homes during a recession. However, people still have to live somewhere, and unless you’re moving in with someone for free or moving out on the street, your only other option is to rent. In other words, more would-be homeowners remain renters.
More Families Being Pushed Into Foreclosure
At the outset of the Great Recession, one out of every five workers lost their job. Even after people found new employment, they earned 18% less, on average. It’s financial hardships like that which pushed more than six million Americans into foreclosure during the last recession. With a recent foreclosure on your credit, it’s difficult or impossible to buy a new home, so more people are forced into renting.
Fewer Homes Being Built
With fewer would-be homeowners entering the market, housing developers start to taper off the number of new homes being built. During the Great Recession, for example, new housing starts dropped by 36%. For people who prefer new homes especially, there may be fewer options from which to choose.
How Recessions Affect Homebuyers and Sellers
Buying a home in a recession can be a great thing for you if your personal finance conditions allow it. You can make yourself a standout homebuyer by working to grow your credit, finding a very stable job, and saving a big down payment. You may have more options to pick from (although fewer of them may be new homes), house prices may be lower, interest rates may be cheaper, and you’ll have more bargaining power. For those reasons, recessions can often turn into a buyer’s market. On the other hand, if you’re selling a home, you may need to adjust your expectations in terms of how long it takes to sell your home and what concessions you’ll need to make to get a buyer. By not overpricing your home and making it as attractive and move-in ready as possible, you can boost your odds of successfully selling your home.
