How to take advantage of the housing recession

housing recession

Let’s face it, the economy is in dire shape, with inflation running rampant at a whopping 8.3% many fear we’re already in a recession. With home prices still sky high and rates at 7%, housing unaffordability hasn’t been this bad in a very long time. But does that mean you should stay away from buying real estate right now because a housing recession seems to be incoming?

Today, I’m going to talk about how to take advantage of the real estate recession that we are about to face, and how you can still come ahead.

What's been happening this year?

It surely has been a pretty tough year if you have thought about buying a house and finding a good deal. At the beginning of the year and really through the start of the summer, it seemed like home prices had no ceiling. The June national median listing price for active listings touching $450,000, and that was up 16.9% compared to the year before.

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Meanwhile, mortgage rates have increased by more than 2 percentage points in the first six months of 2022. The result is a push on the monthly payment on a median-priced home up by nearly 50%. For context, at the beginning of January, the average 30-year fixed rate stood at just 3.5% compared to 17 year high of about 6.5% today.

So if you had taken out a loan for $500,000 with a 3.5% rate, your monthly payment would be $2,245. Compare that with a 6.5% rate, and you’re staring at a $3,160 payment every month.

This past week, Fed chairman, Jay Powell just said:

For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level and at a reasonable pace and that people can afford houses again. We probably in the housing market have to go through a correction to get back to that place. This difficult [housing] correction should put the housing market back into better balance.”

So it appears as all the signs for a housing recession are all there.

And obviously, when we think of a housing recession, or slowdown even, the 2008 housing crash comes to mind fairly quickly. Home prices dropped, mortgage payments on adjustable-rate mortgages jumped and millions of homeowners went into foreclosure because they no longer could afford their payments.

What's the difference between this housing recession and the housing crash of 2008?

When we think of a housing recession, or slowdown even, the 2008 housing crash comes to mind fairly quickly.

Home prices dropped, mortgage payments on adjustable-rate mortgages jumped and millions of homeowners went into foreclosure because they no longer could afford their payments.

However, there are some pretty big differences between now and then.

Prior to 2008, lenders were offering subprime mortgages to pretty much anyone with a heartbeat. These loans were given to people with bad credit scores, no proof of income, no down payment, and a low teaser rate for the first 6 months of the loan.

That led to a soaring demand for homes, which made prices skyrocket. When these borrowers were eventually unable to continue payments, they simply walked away from the home. For starters, they had very little reason to stick around since most had homes over-leveraged with banks lending 100% or even 125% of the property’s value at the time.

Surely, the financial institutions holding those mortgages were suddenly unable to collect, leading them to file for bankruptcy. Since then, many regulations and policies have been adopted to prevent over usage of subprime mortgages, meaning for people with lower credit and lower income, it’s much harder to get a loan.

In a nutshell, bad lending practices caused the last housing recession.

This time around, virtually everyone who buys a home is well-qualified.

Most people have to put a down payment on a house. Their credit scores are in good shape and they make a sufficient amount of money to qualify. The surge in home prices over the last 2 years has also caused home equity to reach the highest levels of equity in history, with the average equity per homeowner reaching a record high of $300,000.

The housing shortage

For a decade following the 2008 crash, builders didn’t build enough homes. Today homes are still getting snapped up by buyers and put under contract in near-record time — just 16 days on average. With low supply and high demand, prices are expected to stay afloat.

Moody’s  has recently downgraded their U.S. housing market outlook.

Peak-to-trough, Moody’s Analytics expected U.S. home prices to fall between 0% to 5%, and fall between 5% to 10% in significantly “overvalued” housing markets. That August forecast assumed no recession. If an economic downturn manifested, Moody’s Analytics expected U.S. home prices to fall between 5% to 10%. While significantly “overvalued” housing markets would fall 15% to 20%.

Moody’s Analytics

But let’s assume that U.S. home prices decline 15%.

That hypothetical drop wouldn’t fully erase the staggering 43% jump in U.S. home prices we saw during the Pandemic Housing Boom. However, it would be the second biggest home price decline of the post-World War II era. Only the bursting housing bubble, which saw U.S. home prices decline 27% between 2006 and 2012, would have it beat.

The reality is that unless inventory levels pick up much faster than predicted, we’re unlikely to see a catastrophic drop in home prices because supply is still so incredibly low. As of the end of March, there was only a two-month supply of available homes on the market, according to the NAR.

Why you should purchase a home during a housing recession?

First off, you can actually negotiate with someone selling their home.

For the past two years, it’s been a seller’s market.

Sellers have loved bidding wars over their homes, with buyers paying above asking price, waiving contingencies such as inspections and appraisals, and even offering to name their firstborn child after the seller.

Competition for available homes has been so fierce that buyers have had to move fast. The typical home was selling in 15 days on average this past spring, with some buyers placing offers the same day the home was listed.

During a housing recession, home prices usually decrease as demand slows.

You’ll see a home seller start to get anxious at the fact that their home has been on the market for 30-45 days without receiving the offer that they are expecting. This opens up the possibility of buying a home at a more affordable price or simply, by having the seller contribute to your closing costs.

Interest rates (and mortgage rates) will eventually go down

A recession means that economic activity has slowed enough for the Federal Reserve to try to stimulate economic activity by reducing the federal funds rate, or the interest rate banks charge each other for overnight loans.

Of course, it doesn’t seem like a great thing to buy a home with a 7% interest rate but you should not make your decision solely based on it. If the right opportunity presents itself to buy the dream home you can afford at a higher rate, take it. Because you always have the option of refinancing your mortgage at a lower rate later on.

Less competition means more choices for buyers

During a housing recession, the market cools and more potential buyers step away from the market, in a way, creating some much-needed inventory.

There will also, unfortunately, be homeowners who for financial reasons have to sell their homes, adding even more supply to a market that is still well below normal levels.

The bottom line

Whether you want to get into real estate because you need a place to live or because you are looking to invest, It should always be the most important thing to have your objectives defined.

Because even if the market comes tumbling down, the fact of the matter is that people still need housing.

If you’re an investor, keep in mind that if demand for rental properties remains constant or even rises during a recession. On the other hand, if there is a limited amount of housing available, property investors are better positioned to rely on a consistent stream of rental income.

Last, In the event of a recession that results in stagflation, real estate can also serve as a hedge against inflation. Stagflation is when inflation and unemployment are both high. When consumer prices rise, real estate values generally follow suit, making them a more inflation-proof investment.

Start your home purchase journey

Get answers to your questions and save thousands on your home loan by comparing different programs and interest rates. 

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