Ask the Egghead: How would a recession affect real estate?

Dear Egghead: Are we in a recession, and, if so, what will be the impact on the housing market?

ANSWER: Oxford defines a recession as a temporary economic slump that cuts trade and can be recognized by two quarters in a row of falling Gross Domestic Product. In practical terms, though, if there’s robust discussion of a recession, we’re probably in one — or headed toward one.

Generally, recessions are bad news for the real estate market. When the economy is struggling, fewer people can afford to buy a home. Supply grows, listings remain for sale longer, and downward pressure is exerted on prices. When times are really tough, mortgage delinquencies and foreclosures climb.

Despite all the doom and gloom, a recession can be a great time to buy real estate. Prices fall, the government tries to boost the economy with lower interest rates, and the costs of mortgages drops. Sellers are more likely to make concessions. All this assumes, of course, that the income you need to pay for a mortgage is solid. Layoffs and reduced pay are another common marker of recessions.

On the other hand, a recession is probably not a great time to sell. If your home is a recent purchase, you may be underwater on the loan — your mortgage balance is more than the value of your home. It’s simply harder to sell during a recession.

During the last downturn in 2007 through 2009, home prices cratered because mortgage underwriting was lax, and it turned out that many recent borrowers weren’t able to make their monthly payments. That was the outcome of a subprime lending spree. That’s not likely to happen now because lending standards are much more strict now.

The bottom line: look at the folks who bought homes during the market downturn of 2007-2009. They made out like bandits.

Buying or selling? Ask me for a FREE consultation! mobile 571-294-7416