Is A Recession A Good Time To Buy A House?

Key takeaways

• Recessions can be a good opportunity for would-be homeowners to secure some real estate
• But this isn’t a traditional recession, if we can call it that, and buyers face high interest rates on mortgages and lack of supply
• A home is a long-term investment, so timing the market isn’t always the best move

Recessions: not a lot of fun in general, but there are some investment opportunities off the back of them, one of them usually being property. If it’s the right time for you to consider buying a home, you might be keeping a close eye on the housing market.

The problem is the housing market isn’t playing ball right now thanks to a few unique circumstances causing a perfect storm. We’ve made the case for and against buying a home right now, that can give you some steer on whether this asset class could be the best move for you.

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Is the U.S. in a recession?

As it stands, we’re in an economic downturn right now rather than a recession. High inflation has been tempered with the Fed raising interest rates, and the data sets are all trending in the right direction in bringing inflation down.

Stocks are also up this year after a dismal 2022. The S&P 500 is up 7.61% in 2023 as of Thursday morning, while the Nasdaq Composite is up 16.26%. We’re not seeing any significant signs of traders selling off as of yet.

But the ‘R’ word has still persisted. Hundreds of thousands of workers have been laid off in 2023 alone as companies look to cut costs. The International Monetary Fund (IMF) has said “the fog around the world economic outlook has thickened” and expects the global economy’s growth to slow.

Turmoil in the banking sector has left investors nervous, as Warren Buffett has predicted more bank failures are on the way.

It’s a very mixed bag right now, making the decision on whether buying a property is a good idea in the current climate even harder to call. The housing market isn’t behaving normally thanks to short and long-term stressors, so let’s assess the pros and cons on the newest data available.

The case for buying now

The Fed recently raised interest rates to a 4.75% – 5% target range after aggressively raising rates at a dizzying pace throughout 2022. The jury’s out on whether another increase will come in May, but higher interest rates are here to stay until rampant inflation hits a more comfortable level.

The median home price in the U.S. back in Q1 of 2020 was $329,000. In Q4 2022, the average was $467,000 – a massive $138,000 difference. The rapid pace of climbing interest rates has softened the housing market, which is slowly affecting house prices – that Q4 2022 figure was the first time since the pandemic that house prices have fallen (in this case, 0.1%).

There’s more evidence house prices are falling in 2023. The S&P CoreLogic Case-Shiller Indices released its latest data at the end of March, revealing price growth dropped 2% from December 2022 to January 2023 to 3.8%. Crucially, the report found U.S. house prices have dropped seven months in a row.

So, prices are trending downwards after record highs. If interest rates continue to go up or stay at similar levels, we could see further decreases in 2023 – good timing for those would-be homeowners that have been waiting to pounce.

The case against buying now

While every recession means an economic downturn has arrived, the circumstances that bring about each recession are different. Right now we’re not even technically in one, yet we’re facing high house prices and interest rates nearing 7% on mortgages, which haven’t been seen since 2008. Locking into a deal now could mean you’re paying much more interest in the long run.

Another thing to consider is mortgages could be harder to secure. The collapse of Silicon Valley Bank and Signature Bank sent shockwaves throughout the banking industry, even practically toppling Swiss bank Credit Suisse. It’s left banks jittery and while we haven’t seen any real-term effects hit homeowners yet, further instability could have banks retreating on mortgages.

Finally, housing stock is pretty thin on the ground – and has been since 2008, when the housebuilding industry cratered. Anyone locked into a good low-interest deal from before the pandemic isn’t moving anytime soon. As for those homes that are on the market? There’s just not enough of them.

The most up-to-date housing inventory figures show 980,000 units, up 15% from record lows last year – but still low. Last year, the National Association of Home Builders said that U.S. homebuilders would need to construct one million more homes to keep up with demand. As a result, we’re seeing an interesting phenomenon where house prices aren’t falling as quickly as they would in a normal recession because demand is outstripping supply.

The Mortgage Bankers Association has predicted mortgage volume will decline further in 2023, revealing a market-first: banks are actually losing money on mortgages for the first time ever thanks to the mortgage rates increase and low housing inventory issue.

The bottom line

Whether or not to buy a house in a recession depends on your personal circumstances, risk appetite and credit score to get access to the best deals on the market. A house is a good investment for anyone, but high interest rates and low supply could scupper the market.

Ultimately there’s never a perfect way to time the housing market, and a home is a long-term investment. If you’ve got your heart set on this asset class, then the age-old advice for saving up a decent-sized down payment, and shopping around for the best rates, still holds true.

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