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How Does a Recession Affect the Real Estate Market?

Recessions are an event that impacts every aspect of our economy, including the real estate market. The unpredictability around a recession can turn a seller’s market into a buyer’s market seemingly overnight. Unfortunately, a recession guarantees nothing. Once a recession ends, there’s no telling what the real estate market may look like.

A recession can also last longer than expected. The economic damage is often lasting and the ‘bounce-back’ is not something that can be relied on. With that said, a recession does not necessarily mean the real estate forecast is all doom and gloom. In fact, those who are financially savvy can capitalize on a recession and make a profit in the real estate market.

Here are some deeper insights into how a recession affects the real estate market, directly and indirectly:

Buyer vs. Seller’s Market

A recession means numbers and values are down. If you’re selling in a real estate market in a recession, the value of your home will be less. For those who need their homes or properties sold more or less immediately, this creates better terms for a buyer. Work with a professional real estate agent to capitalize on this market trend, ensuring that you save money during any property transaction.

If you’re a seller, you may not want or be able to afford to hold onto a property you’re selling for long. Selling in a real estate all but guarantees a long journey towards selling a home. This is pressure. If you need your property gone, you may have to compromise on sales price and be willing to accept offers that are less than what you may prefer.

Some sellers are going to say ‘heck no!’ to selling in a recession and will hold on for a later date. Every time there’s a recession, home sales fall. Declining home sales is a sign that there’s some hesitation in the market, resulting in houses for sale staying on the market for a longer period of time.

Changes in Real Estate Demand

Depending on why a recession happens and how long it goes on for, the consequences can drastically change real estate demand. For example, some city centres are built around one or two industries. If they lose this economic activity, value of property goes down. In the current recession around COVID-19, for example, we are seeing higher demand on rural real estate. There are also temporarily tumbling values of inner city real estate, with more people seeking to escape populations in the city and/or to work remotely.

Normally, trends in the real estate market may be going along at a moderate pace. However, in a recession, trends have a way of speeding up. For example, a market that’s seeing a funnelling out of property owners and lower property values may be plunged towards worse conditions. Alternatively, a market that is on the upswing may stall. Most trends that increase in intensity are sadly negative. This, of course, opens up certain real estate opportunities for some.

In addition, a recession often hits the commercial real estate market twice as hard. While there is an impact on the residential real estate as well, the repercussions are more noticeable among commercial real estate. Often, the commercial real estate market sees increased vacancies. As a result, commercial property holders exit after shutting down their business or being unable to pay their rent.

Less Deals & Less Competition

During a recession, real estate sellers are stressed. This can often mean neglecting certain aspects of selling a home. A buyer may find title issues on a home around debts owing, major appliances missing, renovations incomplete, and other issues. What could appear to be a great deal on price could equate to higher-than-expected costs once the agreement’s signed and you’re moved in.

Sellers pull their homes in recessions and a lot of buyers won’t have the economic supports to secure a property. Less buyer competition means fewer rivals bidding on a home you like. That means less urgency and more time to shop around. It also reduces the pressure to submit a bid exceeding the asking price.

Tighter Lending Practices

Lenders are more cautious in recessions. They are less likely to issue new loans. They will look at mortgage applications with more scrutiny, may increase the minimum credit scores or the downpayment requirements, and may make it all-in-all more difficult to acquire a mortgage for some. This may disqualify some buyers only temporarily from acquiring the economic supports to buy.

Similarly, rent delinquencies increase during recessions. Certain regions may have moratoriums on evictions. There could be strain between landlords and tenants, leading to complications and uncertainty in certain real estate markets.

How Recessions Affect Mortgages

When a recession hits, the government responds. Typically, one way they respond is by initiating low interest rates under the belief it will stimulate economic growth. In real estate, low interest rates make it possible to secure better terms on a mortgage.

However, recessions may hit deeply for homeowners struggling with their mortgages. People lose their jobs and some may declare bankruptcy. Those that are locked into a mortgage may soon start to miss payments. This is expected. How this impacts the greater landscape of real estate is largely by introducing further chaos.

At a certain point when a mortgage holder cannot pay their mortgage, the bank forecloses. Cheap real estate hits the market every year post-foreclosure which is an opportunity for prospective buyers looking to get in the real estate game on a more affordable property.

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