Should You Buy A House During A Recession? Pros, Cons And Tips

If you’re looking to buy a new home, or one that’s new to you, it’s natural to wonder when the right time is. The answer to that question is different for everyone because it’s extremely dependent on your financial situation. However, you might look at the broader economy and the impact on real estate. Should you consider buying a house during a recession?

While there’s some debate over whether we’re soon to enter a recession, it’s important to understand how recessions affect the real estate market. This way, you can be prepared for whatever comes at you in your home purchase process.

What Is A Recession?

Before talking about whether you should buy a house during a recession, it’s worth discussing how you know when we’re in one. And to do that, you need to be able to define a recession.

Everyone seems to agree on the basic framework of the definition: A recession is a sustained decline in economic activity. This has traditionally been applied to countries, but it’s also utilized by some analysts looking at individual sectors. For example, an economist or industry observer might talk about a housing market or manufacturing recession.

While the definition might be straightforward, when the economy actually tips into a recession is a different and more difficult question to answer. The answer depends on who you talk to.

As a general rule, many observers would say you’ve entered a recession if the gross domestic product (GDP) in a country has declined for two consecutive quarters. Critics of this approach point out that GDP is only one metric.

In the U.S., recessions are officially called by the National Bureau of Economic Research (NBER), a nonprofit that looks at a variety of economic indicators. They have the Business Cycle Dating Committee, whose mandate is to determine economic peaks and troughs. These are the high and low points of activity.

In the NBER model, the time between the peak of the last expansion and the low point of economic activity is a recession. When things pick up again following a trough, the economy is in an expansion until the cycle repeats itself.

What Happens During A Housing Market Recession?

When a recession happens in the housing market, a few things generally follow: home prices and mortgage rates fall at the same time lenders tighten standards. This means there can be a major impact on how much a house is worth.

The edge case we have here is 2020. NBER declared the recession from February – April 2020 at the very beginning of the pandemic. On one hand, prices for new homes fell substantially during this period. On the other hand, prices of existing homes continued on an uninterrupted upward trajectory.

The recession prior to this was December 2007 – June 2009, which is a much more classic example. In this case, the prices of new homes were down, as were prices of existing homes. Why did the existing home sales market react differently in 2008 than it did later in 2020?

It’s important to note that all the data used to decide whether the economy is in a recession is backward looking. It’s not as if there’s a giant bat signal except instead of alerting Bruce Wayne, there’s a text sent to Jerome Powell’s cell phone. You may not know you’re in a recession until you’re through it.

In February 2020, home construction was shut down in much of the country, so builders looking to get paid wanted to offload whatever inventory they had. In the existing home sales market, things were rebounding before homeowners ever had time to adjust. This tracks with what happened in 2008. Prices didn’t start falling really until June but dropped through the following January.

Mortgage rates did drop throughout the period between 2007 – 2009, although it’s worth noting that there were ups and downs. In December 2007, rates were in the low 6% range. By April 2009, they had fallen to the high 4% range.

Comparing that to 2020, rates fell about 0.6% between the beginning of the year and mid-June. Although the drop wasn’t quite as pronounced as it was during the earlier period, rates were already fairly low to begin with, in the high 3% neighborhood.

The other thing that happens is that lenders start to be extra careful. Because there’s less job security during a recession, lenders often wish to see higher credit scores, and lower debt-to-income ratios (DTI) and even more reserves.

Is A Recession A Good Time To Buy A House?

This is one of those questions that’s better in theory than it is in practice. In theory, buying during a recession could enable borrowers to take advantage of lower home prices and lower interest. It might be the best time to buy. Might.

But as we just talked about, you never know for sure when you’re in a recession until after the fact. If you’re trying to time the market, you would have to be extremely lucky. That’s probably not going to work out perfectly.

Second, every theory has an exception that proves the rule. In 2020, mortgage rates fell, but home prices certainly didn’t. Right now, we have rising mortgage rates, but it’s not as though home prices are falling off a cliff.

Rather than employ the movements of the stars and a phone psychic to tell you the right time to make a move, it’s better to just decide whether it’s a good time for you to buy based on your personal goals and your financial situation.

Tips For Buying A House During A Recession

If you’re considering your options, here are several tips we have for buying a house during a recession, or at any other time for that matter.

1. Decide If You’re Ready To Buy

The single most important thing you can do to buy a home is take stock of your finances and see if you’re ready. Sit down and look at your monthly budget. What monthly mortgage payment would you be able to easily handle? This is important because although lenders will give you a number you can afford on paper, you don’t want to stretch your finances beyond what you’re comfortable with.

The next thing to look at is your credit profile. How is your credit score? If you take on a new mortgage payment, is your debt still manageable? Do you have reserves to assist in the payment if you have a temporary loss of income?

Finally, there is an upfront cost associated with buying any home. You’ll need to have some savings for a down payment and closing costs. However, there are ways to lower both of these if you qualify and/or negotiate with your lender.

2. Get A Mortgage Preapproval

Getting preapproved for a mortgage will help you in any market because it shows sellers and their real estate agents that you’re serious and you’ve done the legwork to get the financing to back your offer.

It’s important to note that not all approvals are the same. You want your approval to be back by rock-solid documentation. Our friends at Rocket Mortgage^® offer a Verified Approval.¹ In addition to doing a soft pull of your credit (which won’t impact your credit score like a hard pull), they verify your income and assets with documentation such as pay stubs, W-2s, 1099s and bank statements.

3. Watch For Housing Market Changes

The next big thing you can do is pay attention to trends in your housing market. Really knowing what’s happening in the areas you’re looking can arm you with important information. As an example, you can find the average days on market.

If you have your eye on a home listing that’s been on the market for longer than the average in your area, a price drop could be coming. You may also choose to make an offer, but know you have more leverage based on how long it’s been on the market.

4. Track Interest Rates

While you shouldn’t really try to time interest rates, you can watch them. If you’re in the market for a home and you see a rate you like when they fall, you can feel empowered to jump on it. Because you’ve been keeping your eye on things, you’ll know a good rate when you see one.

FAQs: Buying A New Home During Economic Recessions

Now that we’ve gone over the basics of what you should think about when buying during a recession, let’s wrap up with a few of the more common questions around this topic.

Do house prices drop during a recession?

House prices might drop, but it’s not necessarily a given. It may come down to how long the recession lasts. If homeowners are forced to sell and it’s become obvious that the economy isn’t as good, home prices could fall. You might get a deal.

Do mortgage rates go down during a recession?

Mortgage rates do tend to fall during a recession. In each of the last two recessions, the Federal Reserve has stepped in to lower the short-term federal funds rate and buy high volumes of agency mortgage-backed securities. Both moves have a tendency to push mortgage rates down.

Is it harder to get a mortgage during a recession?

Because finances for many can be on shaky ground during a recession, lenders often tighten standards. You may need a higher credit score, bigger down payment or lower DTI. However, certain things may also work in your favor. Mortgage rates and home prices could be lower, increasing your affordability.

Should first-time home buyers consider buying during a recession?

First-time home buyers should consider buying a home when they’re ready from both a financial and lifestyle perspective, regardless of whether there’s a recession. In making the choice to move forward, they should know they have the monthly budget for their mortgage payments. Make sure you have money saved for the down payment and closing costs.

The Bottom Line: Borrowers May Get Good Deals During An Economic Downturn

A recession is a downturn in economic activity that lasts a significant period of time. In a housing market recession, mortgage rates drop and home prices typically do as well (though not always). If you’re considering buying during a recession, certain habits work well in any market. Make sure you’re ready, get preapproved, and watch the market and interest rates.

If you’re ready to get started, apply for a mortgage with our friends at Rocket Mortgage.

¹ Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including, but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.