What you need to know about buying a home during a recession

Amanda Fallon
Published on November 30, 2022

What you need to know about buying a home during a recession

In 2008, the media was almost singularly focused on the Great Recession. From the housing market downturn and bank bailouts to job losses and a massive increase in the poverty rate, it’s a time most of us hoped to forget.

The “R” word is back in the news, however, and Americans appear to tightening their belts.

Will we have a recession, or won’t we? Expert opinions vary as to not only whether or not we will, but when it will happen and how long it may last.

There really is no clear course, no crystal ball to let us know, at least not right now. Everybody is sort of playing it by ear, or by gut.

What happens to mortgage interest rates during a recession?

“The inflation rate doesn’t directly affect mortgage rates, but the two tend to move in tandem,” according to Michael Flannelly at sofi.com.

Unfortunately, many homebuyers are finding out the hard way how inflation can impact mortgage rates. As consumer prices began heating up, the Federal Reserve stepped in to try to cool them off. The did so by raising the cost of borrowing money, which in turn trickled down to the mortgage market.

If inflation can’t be tamed, we may enter the recession everyone is dreading.

The Mortgage Bankers Association (MBA) is predicting that recession will hit in 2023 and that by the end of the year, mortgage rates will sit around 5.4%.

What about home prices?

The truth is, not all recessions are alike and not everyone is impacted the same. For instance, aside from the Great Recession when home prices hit rock bottom and interest rates were the lowest they’d been in a very long time, home prices often increase during a recession.

During the 1981 recession, for example, home prices increased 4.5%.

This time around, however, the market has already begun to transition before anyone mentioned the “R” word..

At this writing, home prices are falling. In October, “… almost one-quarter (23.9%) of homes for sale experienced a price drop, double the rate of a year earlier,” according to Business Wire.

How to know when it’s the right time to buy a home

A good place to start when making the decision is to consider how stable your job is and, of course, your budget. Do you have an emergency fund?

Regardless of market conditions, buyers should consider their budget, income stability and emergency funds before they buy a home in the current housing market.

Next, consider how long you plan on living in the home. Short-term ownership (five years or less) could set you up to possibly lose money if the market continues a downturn well into the time you plan on selling.

Then, there is the temptation to attempt to time the market. When considering buying a home, “… many potential homebuyers attempt to predict if home values are rising or falling while also paying attention to mortgage rates,” said Dan Moskowitz at Investopedia.com.

Trying to predict the future housing market is never wise, as “… you could end up pricing yourself out of the market,” according to Natalie Campisi at forbes.com.

The bottom line, however, is that the best time to buy a house is when you can afford to do so.

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