Recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
Economic decline and falling home prices aren’t anything new. Housing prices took a huge nosedive during the Post Election Violence. In hindsight, that housing recession wasn’t really a good time to buy real estate in the short term because it lasted 10 years.
But all recessions since then have lasted a period of two years or less. Many of them shared falling stock prices, high interest rates, high unemployment rates, and a loss of consumer confidence—and they were all good times to buy real estate.
You should know all the pros and cons regardless before you plunge in.
Buying Homes in a Housing Recession
The question isn’t really how low can prices go during a recession. It’s how much real estate you can afford to buy before prices go back up.
Getting a good price is just as important as being able to hold on and ride it out, but make an honest appraisal of your own financial circumstances as well. Recessions don’t just affect homeowners. Ask yourself if you’re comfortably sure that your job won’t be going away anytime soon, or that your business will continue to thrive in the current economy, and be honest with your answer.
Figure out if it makes financial sense for you to buy in a down market.
Don’t try to time the rock bottom of the market. Prices will already be on the upswing by the time you realize they’ve hit bottom. Real estate moves in cycles.
Advantages of Buying During a Recession
It’s not unusual for sellers to price their homes too high in a depressed market. They might be in a state of denial. But nothing’s stopping you from offering a more realistic price based on the market. You might get lucky.
It might warrant a second look if you spot a home that’s been languishing on the market for some period of time. The seller might be ready to agree to a price reduction now, despite having stuck to listing price for months.
You might also be able to include a few “extras” in the sale that a not-desperate owner wouldn’t consider parting with. Think that riding mower you noticed in the garage.
The seller’s economic misfortune might be your gain. You could also try negotiating closing costs.
Drawbacks to Buying in a Housing Recession
Not every home you spot for sale will be a good deal. Some will require extensive repairs, or they might be located in the wrong neighborhood. The key to buying a home is and always will be location, location, location, regardless of the current economy.
Fixtures are considered to be real estate because they aren’t personal property and they’re affixed to the land or to the house. They stay with the property. This doesn’t stop some desperate, hard-pressed homeowners from smashing walls to rip out wiring or copper pipes so they can sell them for scrap in back alleys, so be on guard.
Some of the lowest-priced homes will be those that require extensive repairs. You should be able to tell the difference between a major rehab or a home that just requires small cosmetic fixes—or hire a good appraiser to do it for you.
Foreclosures and Short Sales
Foreclosures, short sales, and REOs abound in poor economies. Mortgage defaults affect home values. Nearby homes often feel the effect of foreclosures, especially when many foreclosures have been filed.
You’ll want to understand the differences between these types of transactions. For example, you’ll want to know why a seller’s lender is required to approve a short sale and what’s involved in closing this type of transaction. You’ll also want to do your homework on the background of each property.
Don’t Neglect a Title Search!
Sellers in financial distress might not just be underwater on their properties. They might owe others considerable money as well. Fe sure to have a thorough title search done to ensure that there aren’t any liens placed against the property by contractors, taxing authorities, or lending institutions.
You don’t want to “buy” these along with the property.