Real estate seems like a solid investment in theory. Property always has some value, and everybody needs a home. But the market is different in a recession. What are Realtors to do when demand is at its lowest and interest rates are often very high? Whether someone is buying or selling, there are plenty of factors for homeowners to consider.
Recessions generally have low demand, low funds, low employment, and high interest rates. This means that consumers generally do not spend as much, especially on luxury items. Most of their funds will be focused on living costs or paying off debts.
People in a recession often wait to buy cars or other big-ticket items like a new house.
The 2007-08 Global Financial Crisis: A Case Study
In 2004, the American housing market was at its peak when almost everybody who had a house wanted one. Mortgage rates were low, encouraging people to buy. And, of course, new homes were being constructed. There was a high supply of homes and a demand to match. It seemed like a solid, quick investment at the time.
The bubble burst in 2006 when Americans could not sell their homes without major economic losses. Their houses were suddenly worth substantially less than when they had purchased them, and if they had adjustable-rate mortgages, the difference between their homes’ costs and values got greater and greater. This caused many Americans to give up homes they had bought only a few years earlier.
This led to a recession around the world. Swiss bank UBS declared $3.4 billion in losses in October 2007. All three of the major banks in Iceland fell like dominoes. Major bank after major bank toppled over, including Bear Stearns, a bank that had been a staple of Wall Street since 1923. Predatory lending practices in the housing market largely caused this.
By 2008, the global economy fell $2 trillion into debt, earning this event the name “Great Recession.” Housing prices dropped by almost 13%. Around 3.8 million Americans lost their homes due to foreclosure.
The Great Recession did not bode well for Realtors. The housing market got a bad reputation due to the damage caused by predatory lending. The Enron scandal added a need for more financial oversight.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereafter the Dodd-Frank Act). This legislation did two very important things. First, it increased government oversight of banks, forcing them to have a certain amount of cash in their coffers and restricting how banks could invest. The Financial Stability Oversight Council regulated them.
The second covered various consumer protections, including the Consumer Financial Protection Bureau (CFPB). Whistleblowers were also encouraged, particularly in light of the Enron scandal.
Homebuyers During a Recession
A recession typically results in a buyer’s market because prices decline as inventory increases and sales slow. Therefore, two types of people willing to buy homes in a recession are those who need a home and have the financial ability, and those with considerable funds waiting for a bargain. Furthermore, making things worse, there are rising interest rates, and lenders often tighten their lending standards.
Sellers During a Recession
In a recession, sellers should not expect to get extraordinarily high prices while also insisting on favorable terms such as waving the inspection. There is much less competition for homes during a recession, so sellers must compromise more with buyers.
Furthermore, many real estate sellers take their homes off the market during a recession and choose to wait till the market turns more in favor of sellers.
Recessions are challenging for real estate as demand wanes and sales of homes slow. However, buyers will continue searching for properties, especially those who need to move and have been waiting for an opportunity for the market to turn and favor buyers again.
Nobody wants another Great Recession. But, should it happen again, there are more protections in place, and buyers and sellers are both better informed than ever before. Policies around large investments like real estate are always in flux, so whether buying or selling, it is worth keep up with the financial news.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients to lower their monthly mortgage payments.