More than a decade has passed since we witnessed the great recession of 2008, and the real estate sector has since rebounded perfectly with sellers upping their asking prices. Buyers, on the other hand, have had to wade through economic challenges to acquire homes. However, the coronavirus pandemic has forced authorities to shut some businesses leading to a plunging stock market.
The global economy is hit, and many are left wondering; are we about to face another recession? Economists are already predicting another recession following the aftermath of the coronavirus, and buyers may be licking their lips as they stare at what may make housing prices take a nosedive. But, is it all good news for buyers?
The Effect of the Recession on Home Prices
Not all recessions are tied to real estate. However, some are, and the impact can lead to an astounding plummet of home values. In other words, when the economy goes underwater, there are chances of subprime mortgages emerging into the real estate market. In that case, homeowners are forced to sell at lower prices, which gives buyers a better opportunity to acquire homes. Nonetheless, you should know how to buy smartly in a recession to ensure the timing is also perfect for your financial well-being.
Factors to Consider Before Buying a Home in a Recession
1. Do Your Homework on the Market
Buyers often get the upper hand in a down market, but that does not mean you should plunge in transactions blindly. You must do your homework well and understand the market. Consider searching for listings online and consult realtors and real estate agents. This research will help you identify the price range in the area you want to buy to ensure that you make an even handed bid.
2. Negotiate With a Realtor
Selling a house in a recession means the seller and real estate agents have to struggle in an environment where there are reduced sales and lower prices. In that case, agents are forced to lower their commission to get deals done. As much as it is the seller’s job to pay real estate agents, you have to be on the know how on what transpires in between. In such an environment, sellers tend to list homes at higher prices to get the agents’ commission covered.
As a buyer, you need a realtor to help lower their commission to get the deal done. You can use the following tips to increase your negotiating leverage:
- Use the same agent to sell your home and buy another one, in case you are planning to remortgage.
- Go for smaller real estate firms instead of companies with more layers of bureaucracy.
- Find an alternative agent if the current one is not willing to negotiate.
- Use the internet to access listings instead of involving real estate agents.
It is essential to have someone who knows the in and out of the real estate market if you are a first-time buyer. Real estate agents play a crucial role in ensuring you get the deal done as seamlessly as possible.
3. Be Honest About Your Finances
The question should not be how low you can pay for a home during a recession, but rather how much can you afford? A recession is likely to cause a financial dip in everyone, including yourself. It is, therefore, essential to make an honest appraisal of your situation and ride on a realistic budget that won’t damage your other endeavors. Understanding your financial position is equally vital as finding the right deal on real estate.
4. Get Everything Ready
Due to the decline in the prices of houses, you are probably not going to be the only one hunting for a bargain home. Other buyers may snap the deal before you get everything inked on papers. To avoid such scenarios, make sure that you have pre-approval for the mortgage and an attorney ready to get the closing paperwork done at a moment’s notice.
It is equally essential to get a home inspector, and an insurance agent lined up for the task as well. These experts will help you identify what should be repaired and the cost of insuring the house before you plunge into a deal.
5. Get the House Inspected Before Making Payment
Using the help of a home inspector is crucial when you consider buying a home. First, you will need to identify the condition of the house to establish the cost of repair that you may have to pump into the house before you move in. Additionally, inspecting the house may get you something to use when bargaining for a better deal. Lastly, home inspections will help you establish if there are any health hazards and safety concerns in the house you are planning to buy.
What You Need to Know
People tend to buy in a recession due to a plunge in the cost of buying. However, some things remain unclear to many regarding the real estate market. Here is what you need to know when buying a home during a recession:
1. Having good credit
The first thing you should consider when intending to buy a home is your credit score. But why does credit score matter? Here is why. Lenders often need some sort of assurance that you will repay in the future. One way in which they get that assurance is by scrutinizing your credit report and history to evaluate your creditworthiness.
A good credit score means you can be trusted to pay back the loan on the mortgage you have applied for. This is because you do not have a history of non-payments. On the other hand, if you have a bad credit rating, lenders may not be willing to get you a loan for the house. Late repayments mainly cause this or if you skipped some repayments before.
2. Strict Lending Regulations
Well, you need a bank or any other lending institution to approve your mortgage application. However, lenders tend to hike their standards before offering any loans during recessions. If you are working in an industry that is likely to get walloped by the economic crisis, you may have problems obtaining a mortgage. It is understandable; no one would be willing to lend someone who may lose their job the next day. Why? Because they are unlikely to repay the loan.
In such cases, you have to show proof of savings that are equal to mortgage repayments for some months. It means that if you want to buy a home in a recession, you need to have some hefty savings ready. Banks and lenders will often be stressed up with the economic situation, leading to tightened mortgage regulations.
3. Down Payments and Private Mortgage Insurance (PMI)
In most cases, a 20% down payment is considered the lucky number if you want to buy a home. That means that you pay 20% of the price of the house as a first deposit before you can get the deal done. However, most people fail to meet this requirement and go for PMI, which means paying monthly premiums that can be used to compensate a lender when you default payment. It is essential to avoid PMI by paying at least 20%. However, you can negotiate with other banks that accept less than 20% down payment.
The Bottom Line
Buying a home in a recession may not be as simple as it looks to some people. You have to be patient and wait for the right moment to buy. Do not jump at the first-rate you are offered, and lastly, understand the situation of the homeowner. After all, what might look like an opportunity for you may not be the same story for a seller.