Many experts are once again predicting recession as economic production seems to be slowing.
The definition of a recession has been typically recognized as two consecutive quarters of economic decline, as reflected by Gross Domestic Product (GDP) in conjunction with monthly indicators such as a rise in unemployment.
Many are concerned that the recession will dramatically and negatively impact the housing market…but historically that isn’t the case.
Real Estate During Recession
Believe it or not, outside of the “great recession” of 2007 (which was caused, in part, to a housing crisis), home values and real estate generally appreciate historically during times of recession.
That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers. Even though property values are higher, buyer see lower payments provided by those lower rates.
When more people can qualify for homes, the demand for housing increases – and so do home prices.
Mortgage Rates During Recession
When a recession hits, the Federal Reserve prefers rates to be low. The prevailing logic is low-interest rates encourage borrowing and spending, which stimulates the economy.
During a recession, the demand for credit actually declines, so the price of credit falls to entice borrowing activity.
Here’s a quick snapshot of what mortgage rates have done during recessionary periods:
Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.
Refinancing or purchasing a new home could be a great way to get in at the bottom of the market and make a healthy profit down the road.
With that said, borrowers should be market-wise and financially savvy when considering large real estate purchases in a recession.
The Great Recession and Home Prices
Home price appreciation continued during previous downturns, except for what is called the “Great Recession”. While the recession officially lasted from December 2007 to June 2009, it took many years for the economy to recover to pre-crisis levels of employment and output.
So what made the Great Recession different? The housing boom that preceded the last recession was largely driven by an explosion in both home-building activity and mortgage credit.
Home buyers were able to get mortgages with no documentation of their income and no down payment. Many loans had introductory 0% interest periods that made them cheap to start but more expensive as time wore on.
Today, those loan products are no longer in existence.
Today’s Market
The growth in home prices seen during the current economic expansion has not been fueled by increased access to mortgage credit. In essence, today’s recession isn’t at all similar to the prior one.
Rather, it’s a simple reflection of supply and demand. Many Americans want to become homeowners, but the supply of homes available for sale is very low, pushing prices upward.
Mortgage rates are much higher than they were a few years ago, but I have a feeling that they will be coming down relatively soon. And more activity will push home prices higher.
In Conclusion
Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.
If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!
