The housing market in recession – What Does It Mean?

There is much speculation that a recession is on the horizon, with some analysts putting the likelihood of a slump at well over 50%. Rising gas prices and interest rates are just two of several economic indicators that paint a grim picture for the coming year. Nevertheless, both the housing and job markets continue to show resilience. 

Contrary to conventional wisdom, strong job growth and stable housing values indicate that the current economic downturn is unlikely to last long. As a homeowner, investor, or would-be buyer, you may be curious about what happens to the housing market during a downturn. 

What is a recession?

The term “recession” describes a period of considerable economic deterioration that can extend for months or even years. The official definition of a recession is a prolonged period of negative growth in GDP, rising unemployment, declining retail sales, and diminishing indicators of income and manufacturing. A country’s economy goes through cycles of growth and contraction, and recessions are generally seen as inevitable parts of this cycle.

What happens to house prices in a recession?

Falling property values are commonly associated with economic downturns, though this is not always the case. This is because fewer people are in a position to buy property when the economy is weak. When demand for housing drops, home values usually fall, and real estate-related income stops. This is a common occurrence; however, it is not always the case. House prices are highly volatile during a recession, with the possibility of both increases and decreases.

The loss of income caused by unemployment makes it more challenging to keep up with mortgage payments, increasing the risk of foreclosure.

Also, mortgage approval standards have increased, limiting the pool of potential homebuyers. Furthermore, when people’s financial futures are up in the air, they are less likely to make huge, long-term investments like buying a house. Foreclosed homes increase supply, but because fewer people can afford to buy now, demand is reduced and prices fall.

The average annual decline in property value during past recessions was 5%. Home values fell by almost 13% across the country during the Great Recession, but the South and West were hit the hardest.

Pros of Buying a Home During a Recession

There are significant advantages to house hunting amid a recession.

Lower Prices

Homes typically spend a long time on the market during a recession because of the decrease in demand. Because of this, it’s more likely that sellers will lower their asking price to attract buyers. Buying a house at auction is not out of the question.

Reduced demand

Many potential buyers may be discouraged during a recession. Home prices may be significantly impacted due to the resulting decrease in demand for the current housing stock. With fewer customers to contend with, you might have an advantage.

Lower Mortgage Rates

When the economy is in a slump, the Federal Reserve often reduces interest rates in an effort to boost consumer spending. Consequently, this causes financial institutions across the board to reduce their rates. Negotiating for a lower interest rate can save money on your mortgage over time. A sizable sum could be spared, depending on how low the rate drops.

Seller Concessions

For sellers, anxiety rises as their homes stay on the market for long. The seller may be willing to cover some or all of your closing fees if you request this in the offer.

Less competition from other buyers

Fewer buyers will likely be in the market because many people cannot buy a property during a recession.

Increased home value down the road

It stands to reason that if you buy a house during a recession, you’ll benefit financially when the economy rebounds and the value of your property rises.

How to invest during a recession if you are saving for a home

During a recession, investors should be careful and keep a close eye on the market for deals on high-quality assets. These conditions are challenging but offer the most significant potential for success.

Don’t try to time the market

When investing during a recession (or any other period), the most important thing is not to try to time the market. For one thing, it’s not always easy to tell when a recession has hit the economy.

Adhering to a long-term investing strategy that is in keeping with your risk tolerance, goals, and time horizon is typically recommended by financial consultants.

Have a diversified portfolio

Keeping a diverse portfolio can help investors weather the volatility of the stock and bond markets and help them reach their long-term financial goals.

Diversification means putting your money into different types of investments, like stocks and bonds. Investments can be made in enterprises of varying sizes and industries at home and abroad. The theory behind this is that if one part of your portfolio is doing poorly, the others can compensate for it.

Moreover, funds, which are collections of securities, are often preferable to individual equities. By investing in a variety of securities through a fund or exchange-traded fund, the risk is reduced.

Have an emergency fund

When deciding how to invest your money during a recession, remember that you’ll need a cushion in case of unexpected expenses, like losing your job. Experts advise keeping three to six months’ worth of living costs in cash. However, some advise keeping even more on hand in the event of an anticipated economic downturn.

What to invest in during a recession

Maintaining your well-planned financial strategy may be your best bet. The following investing opportunities may help you build a more robust and recession-resistant portfolio.

Real estate income funds

Investing in a real estate income fund is a smart move during a downturn. Funds are less volatile than portfolios of individual companies since investors are not betting on the success of any one company but rather on the overall economy and rising market confidence. A real estate fund can provide substantial long-term profits if you can handle short-term fluctuations. Investors who don’t want to spend time and effort researching and selecting individual equities can benefit from investing in well-diversified funds.

Dividend Stocks

Companies that pay a dividend are considered mature and have reached a plateau regarding their potential growth. As a result, these businesses do not encourage expansion through equity but rather distribute dividends from regular earnings periodically (usually monthly, quarterly, or annually).

The annual dividend yield can be as low as 0.01% or as high as 5%.

For example, if your investment is worth $10,000 and the dividend yield is 1.5%, you will earn $150 yearly in dividends in addition to any capital appreciation.

Reinvesting dividends is a popular option because they grow over time and provide even more returns in the long run.

Defensive Stocks

Defensive stocks usually hold steady when the economy or stock market is unstable. One of the main reasons to invest in them is that they hold their value well even in a down economy. Stocks in these sectors tend to be stable since they cater to long-term needs such as food, healthcare, and essential services. Coca-Cola (KO) and Johnson & Johnson (JNJ) are examples of defensive stocks since they have historically fared well during economic downturns. These stocks can help you diversify your portfolio during a recession, but you shouldn’t count on huge profits.

Even though defensive stocks aren’t usually thought of as growth investments, they could be a great way to protect your portfolio when the market is very volatile.

Value Stocks

Value stocks are shares of publicly traded firms that investors anticipate will increase in value relative to their current market price and hence represent profitable investment opportunities during economic downturns.

Diversifying your holdings with some value stocks can be a wise move when the market is falling. Value stocks, however, require a longer investment horizon in order to produce any meaningful returns. Value stocks are an excellent addition to a portfolio if you have money to invest and can afford to let it sit for a few years.

Bonds

Buying bonds is a safe and effective strategy to spread money and reduce risk. You may expect steady growth and income from these low-risk investments over the long term.

But there is always some level of risk involved with investing. Inflation is a significant threat to bond investors. However, if you’re looking for a low-risk, long-term investment, bonds are a terrific option.

Inverse ETFs

Investors frequently use short-exposure inverse exchange-traded funds (ETFs). Like a mutual fund, an exchange-traded fund (ETF) is a grouping of stocks or bonds that trades as a single entity. If you diversify your portfolio using ETFs in the right industry, you can protect your investments from a falling stock market.

The Bottom Line

Home buying during a recession can be wise if you are fortunate enough to maintain a stable income. As the government works to stimulate the economy, mortgage rates may fall, which, combined with a shortage of qualified buyers and reduced competition, might lead to a decline in housing prices. Nevertheless, several dangers are present in times of economic crisis, especially the prospect of widespread job losses. As a result, if your financial situation is precarious, you may be better off waiting.