During a recession, there are usually fewer buyers, so houses stay on the market longer. This encourages sellers to lower their listing prices to make their homes easier to sell. You might find it difficult to sell during this period.
The most recent recession, which occurred in 2008, was disastrous for the real estate industry. Sales fell recklessly, homes foreclosed, and the general market devolved into chaos. This guide will help you understand, “What happens to the housing market during a recession?”
What is a Recession?
A recession occurs when an economy experiences two consecutive quarters of negative growth or when GDP shrinks for two quarters. However, most experts believe an actual recession requires more than one indicator.
Other factors, such as the unemployment rate, income, consumer spending, retail sales, and industrial production, all play a role in determining whether or not a recession exists.
What Happens To The Housing Market During A Recession?
Economic recessions, and the Federal Reserve’s response to them, can have various effects on the housing market.
The Fed usually lowers interest rates during a traditional recession. This encourages people to spend money and stimulates the economy. It also usually results in lower mortgage rates, which means more opportunities for homebuyers.
However, interest rates are rising rather than falling in the current market. Rising interest rates typically raise the cost of obtaining a mortgage to purchase a home. This, in turn, reduces market demand for homes.
Home prices might also change during a recession.
While the cost of financing a home typically rises when interest rates rise, home prices may fall.
Fewer people compete for the same home inventory because there is less demand and fewer buyers. When that competition evaporates, sellers lose the advantage they have enjoyed in recent years’ roaring seller’s market. They will almost certainly have to accept less than their initial asking price — or at least less than they would have received in a more competitive market. While this is bad news for sellers, it can be good news for prospective buyers.
Should I Sell a House During a Recession?
Recessions frequently drive buyers out of the market, but this does not always indicate a terrible time to sell. Let’s examine the pros and cons of selling a house during a recession.
Pros of Selling a House During a Recession:
1. Short sales are unlikely because sellers have equity.
Selling your home before a recession may be the ideal time to liquidate your equity and save for the future. Also, because they will not be underwater on their mortgage loan, homeowners with equity will unlikely need to negotiate a short sale.
Short sales typically take longer because an additional party is involved — the seller’s lender must sign off on the deal, and most lenders are slow to respond to questions or offers.
2. Qualified buyers are prepared to make offers.
If you live in a desirable neighborhood or have a home with desirable features (a large backyard, updated kitchens, an in-ground pool, and so on), buyers will jump at the chance to submit an offer. When a property receives a lot of interest, buyers may offer higher than the asking price.
3. Home prices are record high
Top real estate agent in Texas, Michael Acquisto, and his wife, Shana Acquisto (both with 19 years of experience), say:
“You can’t plan when things will happen and must do what’s best for you. But, before a recession hits, home prices are typically at a peak. You’ll be more likely to receive multiple offers and choose the best terms, such as the closing date.”
Cons of Selling a House During a Recession:
1. Finding a new place to live will be a new challenge.
“Whether buying or selling, you won’t disappear — you’ll have to go somewhere.”
Acquisto is correct. Unless you already own a second home or plan to rent for a while, you will be competing with other eager buyers. As a result, you may have difficulty finding a home that meets your needs and budget.
2. A new house may require you to pay a higher interest rate.
Despite interest rates hitting historic lows in 2020, you may have to pay a higher rate on your mortgage — primarily if you refinanced when rates were low and your credit has suffered as a result of the pandemic.
3. Buyers will expect your house to be in excellent condition.
Buyers believe the house must be worth it if they pay the total asking price or more.
This could put a lot of pressure on the seller to invest the money in getting the home ready to sell. Fortunately, some home improvements can raise the value of your home. It might be worth your time.
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