When seeing signs of nationwide economic collapse, homeowners often wonder if they should sell a house before a recession. Let’s weigh the pros and cons. —-
A raging pandemic, lack of clear plans to contain the virus, millions are unemployed, businesses shutting down, civil unrest, a contentious election and more than 300,000 deaths in the United States alone — 2020 has been one heck of a roller coaster, hasn’t it? It’s emotionally draining! But, as tough as this year has been, the real estate market has prevailed. HomeLight’s Q3 2020 survey reveals that 92% of surveyed real estate agents say they are experiencing a strong seller’s market, and they feel it’s going to stay that way for a while.
Median home prices have risen by 5% to 6% and people are wondering if they should take advantage and sell a house before a recession. It’s a good question because the market can’t meet demand as it stands, and it’s likely properties in certain areas could receive multiple offers. Some houses are even entering bidding wars, according to 88% of agents who participated in our survey.
So, what are the pros and cons of selling a house before a recession, as well as during a recession? And what should buyers know about this situation? Let’s take a look.
Pros to selling a house before a recession
Home prices are at their peak
“You can’t plan when things are going to happen, and you really need to do what’s best for you. But, typically before a recession hits, home prices are at a peak. You’ll be more likely to receive multiple offers and choose the best terms, such as the closing date.”
Sellers have equity, and short sales are unlikely
Selling your home before a recession may be the perfect opportunity to liquidate your equity and build up your nest egg. Also, homeowners with equity in their home are unlikely to need to negotiate a short sale because they won’t be underwater on their mortgage loan.
Short sales typically take longer because there’s an additional party in the mix — the seller’s lender will have to sign off on the sale, and most lenders are not super-quick to respond to questions or offers.
Qualified buyers are ready to make offers
If you live in a desirable neighborhood or have a home with the features buyers want (a big backyard, updated kitchens, in-ground pool and the like), then buyers are going to jump at the chance to submit an offer. Sometimes a property will get so much attention, buyers may even submit an offer above asking price. Cha-ching!
Cons to selling a house before recession
Finding a new house will become a new challenge
“Whether you’re buying or selling, you aren’t going to vanish — you need to go somewhere.”
Acquisto is right. Unless you already own a second home, or you’re planning to rent for a while, you are going to be competing against other eager buyers.
So you, in turn, could have a difficult time finding a home that meets your needs and your budget.
You may have to pay a higher interest rate on a new house
Despite interest rates hitting historic lows in 2020, you could have to pay a higher rate than you’re currently paying on your mortgage — especially if you refinanced when rates were low, and your credit has taken a hit due to the pandemic.
Buyers will expect your home to be in top-notch condition
Buyers feel that if they’re going to be paying the full asking price or above, the house should be worth it. Rightfully so.
This could put a lot of pressure on the seller to invest the money into getting the home to turnkey condition. Fortunately, there are home improvements that could, in fact, increase the value of your home. It could be worth your while.
Pros of buying a house before a recession
We’ve walked through the pros and cons of selling a house before a recession. But what about buying a house? Here’s what you need to know if you’re in the market to buy before a recession.
It’s easier to qualify for a home loan
Before a recession hits, it’ll be easier to qualify and get preapproved for a loan. Lenders realize that people will try to make any big purchases before a recession arrives, and they’ll need to compete with other lenders on rates and terms. They may do this by offering better terms to highly qualified buyers, and some lenders may be more flexible with requirements.
Keep in mind that this is only true before a recession actually hits the economy. During a recession, lending requirements tend to get stricter, making it harder to borrow money to buy a house.
Homes are likely to be in good condition
When a household loses its income stream, or suffers some kind of major financial blow, one of the first things that some homeowners neglect is home maintenance tasks. This means that before a recession, when the economy is in good shape, homes are also more likely to be in good shape because they’ve been appropriately maintained.
Also, sellers want to get houses sold quickly and, like we mentioned above, they may even spring for home improvements that buyers want. This means that if you’re buying a house before a recession, you’re more likely to get a house that is in great condition.
Cons of buying a house before a recession
Home prices will be at their peak (and could get higher)
Before a recession, it’s usually a seller’s market in real estate. House prices are going to be higher, and that might mean you’ll have to make some concessions regarding what you’re looking for in a house.
If you’re dead set on what you want and are unwilling to compromise, you will likely have to submit offers that are at or above asking price.
Inventory is going to be sparse
The hard reality is that for several years, many real estate markets simply have not had the home sales inventory to meet buyer demand. In fact, very low numbers of homes for sale is a good indicator that a recession is looming.
Although sellers could get more money for their homes before a recession, they’re likely to be hesitant to put their houses on the market because they’ll be worried about finding a new house, too.
It’ll be stiff competition to get your offer accepted
Before a recession is not the time to make low-ball offers, especially if you want your offer to be accepted. There are a lot of buyers out there and you’re going to have to put your best offer on the table from the very beginning.
Selling and buying during a recession
Venturing into the real estate market, either to buy or sell, during a recession is a gamble because the market will change. So, let’s weigh the pros and cons.
Pros of selling a house during a recession
Allowing you to downsize and save money
Selling during a recession may be in your best interest if you no longer want to be a homeowner and would rather rent, or if you want to move to a smaller place. By downsizing or renting, you’re decreasing your monthly payments and giving you more money to go on vacations, invest, or put into a retirement account.
Buyers may skip making concessions or repair requests
People who are looking to buy a house during a recession will have lower expectations.
They aren’t going to expect a house to be in top-notch condition and may even be willing to accept a fixer-upper — all in the name of getting a good deal.
Cons of selling a house during a recession
Fewer qualified buyers
A recession means money is tight, unemployment has probably increased, and people aren’t in the position to make such a large purchase.
Home prices are typically lower
Since there are fewer buyers on the market, home prices are probably going to drop. Sellers will have to lower their prices just so they can appeal to the few qualified buyers in the hopes of at least getting one offer.
Pros of buying a house during a recession
Inventory and opportunities to buy increase significantly
One of the major downsides of a recession is that some people may no longer be able to afford their homes, and they’ll need to put their houses on the market to avoid foreclosure and ruining their credit.
For buyers, this is a good thing because the housing inventory will be higher and you’ll have a broader selection to choose from.
There aren’t many buyers on the market
Sellers aren’t the only ones to be negatively impacted by a recession. People simply cannot afford to buy a house because their hours may have been cut, they may have been laid off, or they simply don’t have the savings available to cover a down payment or closing costs.
Plus, lender requirements get stricter when the economy isn’t doing so well, making it harder to qualify for a mortgage loan in the first place.
Cons of buying a house during a recession
Homes for sale might be in questionable condition
In an effort to sell, people are more likely to put their homes on the market in less-than-stellar condition. If they’ve been financially stretched for several months or years, homeowners might have also let standard home maintenance tasks slip.
They may not have the money available to make repairs or improvements, which means buyers will either have to make the repairs themselves, ask for repair credits or look for another house… Where they may run into the same problem.
Sellers are less likely to be willing to negotiate
Then again, you may find some sellers who are so desperate to get rid of their house that they’re willing to negotiate.
It will be challenging to be approved for a home loan
The recession is a difficult time for everyone, and banks will usually increase their eligibility requirements before approving a loan.
Some lenders will require borrowers to have a higher credit score, extensive income history, or a higher down payment. As a result of these increased requirements, buyers may find it more challenging to be approved for some loans.
Should I buy or sell a house before recession?
It can be hard deciding if you should buy or sell when a recession is on the horizon. Sellers don’t want to miss out on a good opportunity to sell when prices and demand are high, but they also don’t want to struggle trying to find a new house of their own. On the flip side, sellers don’t want to find themselves in the middle of a recession and be forced to put their houses on the market because they can’t afford the payments anymore. They certainly don’t want to do this and price their houses lower or accept a lower offer than they want because they need to get the house sold.
The reality is, life is unpredictable and you can’t really plan for these things.
“No one knows the future. No one saw COVID coming. So, you can’t say, ‘There’s a recession coming!’ or, ‘we have a pandemic coming in three months, let’s schedule for it.’ You don’t know you’re at the high point until after hindsight gets you.”
If you’re struggling with the decision, you’ll want to seek the advice of a real estate agent. They’ll be able to fill you in on how the market is doing, trends in house prices, and give you an idea whether your house will appreciate or depreciate in value in the coming months.
“You need to find an agent who truly cares. That’s what separates the best agents from the rest. They’ll invest in you, the client. They’ll give you the best advice and they’ll make sure you understand the process, the market, and everything in between.”
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