Whenever we hear the word “Recession,” the financial crisis of 2008 comes to mind. It was a devastating time; stocks went down, the housing market crashed, and there was turmoil everywhere.
When there is consecutive negative growth in two quarters, it is called a recession. Usually, the NBER analyzes the quarterly growth and declares a recession.
A recession can be devastating. However, some may consider investing in real estate and other asset classes. But should you really purchase or invest in real estate during a recession?
Should I Purchase a Home During a Recession?
Pros of Purchasing a Home During a Recession
1. Incredibly Low Mortgage Rates
When a recession hits, to stimulate the economy, the federal reserve bank usually decreases interest rates, which forces the banks to decrease the interest as well, including the mortgage rates. As a result, if you apply for a home mortgage during a recession, you’ll have to pay the minimum amount of interest on your loan.
2. Lower Listing Price
Apart from low mortgage rates, the listing prices are also lower during a recession. Because during a recession, there are more sellers than buyers. As a result, the listing price of homes drops drastically. So, if you have enough cash; recession can be the perfect time to purchase a house. Again, due to the financial crisis, you’ll see a number of houses at auction. You can take part in these auctions and purchase homes at a low price.
Disadvantages of Purchasing a Home During Recession
· Banks Hesitate to Give Loans
During a recession, everything is uncertain. Many people lose their job, and businesses shut down. That’s why most banks prefer to give loans only to those who have a strong financial background. Because at the end of the day, banks are also here to make money.
So, unless you have a strong financial background or financial stability, you’re unlikely to get a loan for purchasing a house.
· High Unemployment
When a recession arrives, it comes with high unemployment. Even if your industry is secured or “Recession-proof,” you may lose your job anytime. That’s why before purchasing a home, make all the calculations and make decisions accordingly.
This is crucial, especially when you’re purchasing a house with a mortgage. Because the last thing you would want in a recession is to finding yourself in foreclosure.
So, secure your income source first and purchase the home later.
Again, if you’re purchasing a house for renting purposes, you may have a hard time finding a tenant during high unemployment. In the worst-case scenario, your home can remain empty for months.
Bottom Line
Purchasing a house during a recession is a high-risk, high reward situation. If you can manage the financial risk, you can easily 2x or 3x your investment. However, if the risk isn’t well managed, it can bankrupt you. So, analyze the vulnerability of your industry during a recession and your financial condition before committing to the most significant investment of your life.
