It's inevitable that the economy will experience ups and downs. Economists are warning that a downturn looms for the economy sometime in the next 12 months or so. In fact, there are already signs that the economy is slowing down: home sales were fewer than expected at the end of 2018 and the Federal Reserve Bank declined to increase interest rates at its March 2019 meeting. Does this mean you should put your dreams of homeownership on hold?
Pros of Buying a Home During a Recession
- More Homes
As the economy slows down, homeowners might realize they can no longer afford the home they have. Others might decide that the recession is a good time to downsize or to move to another area. Regardless of the reason, a down market tends to provide more homes for buyer's to choose from.
- Lower Prices
Due to the glut of homes in the market, prices are often driven downward. This makes owning a home more affordable. You'll need less money for a down payment, you'll pay fewer taxes and it's likely that interest rates will be lower during a recession.
- More Negotiating Power
A home seller that needs money or who cannot afford their home any longer is more motivated to find a purchaser. You might be able to negotiate a reduced price, for example, or maybe the seller will leave the appliances in the home. Perhaps the seller will include an allowance for carpet replacement or agree to pay one or more closing points.
- Quick Turnaround
For many homeowners, by the time they realize they can no longer afford their house, they are often in financial trouble. This urgency is often coupled with the reality that their credit could potentially be ruined for the next seven years if their home is foreclosed on. This can affect many aspects of their lives including getting a job and finding another place to live. Closing on a home quickly can provide the seller with some relief and help you save money in rent payments.
Cons of Buying a Home During a Recession
- Competition with Investors
The housing crisis in 2008 gave rise to the widespread practice of purchasing a home at bargain prices before renting them out and selling them at a profit later. One thing that many investors have going for them that the average home payer simply can't compete with is that they often have cash in hand. Not only does this eliminate the involvement of a financial institution, but it also means that the seller can shed responsibility for the home more quickly.
- Financing Challenges
As the economy takes a downturn, everyone starts to tighten their figurative belts, including lenders. While the Dodd-Frank Act places stricter regulations on home loans, lenders might implement additional requirements, such as a higher credit score, during a recession.
While economists agree that a slowdown in the economy is inevitable, most don't think it will mirror the Great Recession seen in 2008. Nevertheless, keep the above considerations in mind if you're thinking about purchasing a home during a recession.
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