The recession has hit nearly every market sector, including real estate. The New Jersey real estate market is no exception. For real estate analyst and Rumson NJ native Dennis Lynch, educating clients has always been a primary goal. In these uncertain times, it's more important than ever for homebuyers and real estate investors to know the pros and cons of buying real estate during a recession.
Indicators of a Recession
It doesn't take an economic genius to see that the economy has been hit hard by recent events. Traditionally, a recession is characterized by two straight quarters of economic contraction. The National Bureau of Economic Research will typically wait until the second quarter's figures before formally announcing a recession. In recent years, when the economic collapse was impending, such as at the start of the COVID-19 epidemic, an extraordinary number of corporate bankruptcies and jobless claims seemed probable. At around that point, an economic recession was practically a given, and market upheavals were expected to result in a new recession and changes to the housing market.
Are We in a Recession?
This year, the economy shrank at an annual pace for two consecutive quarters, fitting one standard definition of a recession. As rising inflation and the effects of the war in Ukraine reduced household purchasing power, the International Monetary Fund repeatedly decreased its prediction for the U.S. and global economic growth in 2022 and 2023. Recessions are a common component of the economy, even though they can be unpleasant and frightening. While a recession has not been formally declared, the chances for recession are high.
What Does the Real Estate Market Look Like During a Recession?
During a true recession, home prices tend to drop as an economic downturn often results in less housing demand, which lowers property prices. This was undoubtedly true in 2008 when the housing bubble burst and the world entered a recession. The similarities between a contemporary recession and the Great Recession end there, though, in many ways.
The real estate market of today is different from that of 2006-2007. Due to artificially low-interest rates and illegal lending practices at that time, properties were grossly oversold. These days, mortgage brokers must abide by far stricter lending regulations. Homeowners are less likely to default on their loans as a result. Perhaps most significantly, property values aren't exorbitantly overvalued as a result of artificially high demand.
Home prices in 2022 have remained stable in large part because of the imbalance between supply and demand in the housing market. Significantly, little housing is available. The United States had just two months' worth of available housing for sale at the end of March. This is far less than the ordinary average five-month home market inventory. Housing prices have held stable due to a shortage of inventory even while mortgage applications have continued to decline by more than 50% from last year.
Pros and Cons of Buying Real Estate During a Recession
There are pros and cons of buying real estate during a recession, says Dennis Lynch. It always pays to consider both sides of the equation when thinking about buying real estate.
Pros of Buying Real Estate During a Recession
Potential for Reduced Prices
Two factors come into play during a recession. The first is that there are typically fewer buyers. The law of supply and demand means that when there are fewer buyers, prices drop. So during a recession, when there are fewer buyers, there is the potential for reduced prices, says Dennis Lynch.
More Bargaining Power
During a recession, your real estate agent should help you to bargain. Reduced prices won't always be advertised. But during a recession, sellers are often willing to accept lower bids just to get the sale. This is a great time to bargain with the seller. For example, you could offer a lower price in exchange for foregoing a home inspection or for moving the closing date further out to allow the seller more time to find a new home.
More Concessions
Another way that your real estate agent can help, says Lynch, is by asking for concessions. Because the sellers may be eager to sell, they are more likely to agree to concessions such as paying for closing costs or paying for points. During a recession, everyone is more open to creative solutions, so don't be shy about asking for concessions. The worst that can happen is the seller says no.
More Choices
In a recession, there will be an abundance of properties on the market to choose from. When demand is low, inventory numbers increase. This means those willing to buy real estate during a recession will not have to settle as much for a home that doesn't quite meet their needs. Instead, there's the chance to shop around and enjoy the vast selection.
Attractive Interest Rates
In a recession, the government typically holds interest rates steady or lowers them. This bodes well for people who need a mortgage to buy a home, which is most people.
Cons of Buying Real Estate During a Recession
Just like everything, there is a downside to buying real estate during a recession.
Employment Uncertainty
In a recession, there's always a higher risk of being laid off due to cutbacks or even company closures. Often it's the high-salaried employees who are cut loose first. Even if you believe your position or sector to be stable, things can change very quickly. Always keep in mind that the biggest expense associated with the property is the mortgage. Make sure your job is solid because you don't want to end up being unable to pay the mortgage and get into a foreclosure situation.
Challenges Getting Lender Approval
In a recession, lenders tend to tighten the purse strings. Homebuyers may find it more challenging to get a mortgage approval, says Lynch. A good way to avoid this obstacle is to start now by improving your credit score. The higher your score, the less of a risk you are, and the more chance your mortgage application will be approved.
Title Complications
More homeowners wind up in debt during a recession, which can complicate liens and other issues. In turn, sellers who are deep in debt or even amid a foreclosure may inadvertently create problems with the title. If you do intend to buy real estate during a recession, it's crucial to use a quality title company that will do a thorough title search, says Dennis Lynch.
Foreclosure Red Tape
During a recession, there will be more foreclosures on the market. Foreclosures can be problematic to buy. Banks are not known for being expedient with their internal processes. When banks take back real estate in foreclosure, even though they want to sell it, there's a lot of red tape involved. Homebuyers may need extra patience if they decide on buying a property that's in foreclosure.
Locations Throughout New Jersey Vulnerable to Recession
In New Jersey, the counties of Camden and Gloucester have been identified as being most vulnerable to recession, according to Lynch. Metrics are based on unemployment rates, affordability of homes, and what percentage of income is being paid toward mortgages in the state. If you live in either of these areas, it pays to be mindful of the precarious position. If you're looking to buy in New Jersey, it might pay to start your search in this area.
About Dennis Lynch
Dennis Lynch has decades of real estate experience, as a buyer and seller, an investor, and as an analyst. He currently works with his son Marshall in Rumson, New Jersey in their real estate analyst company.
