Recessions are periods of economic decline that are usually defined by the drop in a nation’s GDP for at least two successive quarters. This period is usually not favorable for a lot of investments. Therefore, it is not surprising for real estate investors to second guess their investment actions.
If you are one of those wondering if investing during this period is the right step to take, then this article is for you. If you are new to the real estate business and you want to learn how to get started, then you need to read this post carefully. We will provide you with all the information you need to decide by discussing in detail the advantages and disadvantages of investing during a recession. But before we go into that, let us take a quick look at the relationship between real estate and recession in the past years.
Relationship Between Real Estate and Recession in the Past
Although the U.S. has had several recessions dating back to the Articles of Confederation, we will focus on those that happened in the 21st century. There have been three recessions in the past decades in this century. Each of them happened due to different reasons and affected the real estate market in different ways.
The Dot-Bomb Recession 2001
This lasted for a period of eight months from March 2001 to November 2001. It occurred as a result of the increase in dot.com business which was partially created by the Y2K (year two thousand) scare. It further escalated after the 9/11 attack.
The real estate market was not affected by this recession compared to the stock market crash. Rather than a decline in the cost of housing, there was an increase of 4.8%. Properties were regarded as safe investments at that time. Coupled with the deregulation of the mortgage market then, and low interest rates, there was an increased demand for houses.
The Great Recession
Regarded as the worst economic downturn of modern times, the Great Recession lasted for eighteen months from December 2007 to June 2009. You can read this article to learn about the aftermath of this event. It was caused by the decline in housing prices which in turn led to a global financial credit crisis. The damage was so massive that it affected every aspect of the national economy.
Since the housing industry was the initial catalyst for this downturn, the cost of home prices took an unprecedented decline. The practices associated with subprime mortgages led to the issuance of several high-risk loans. This, in turn, led to an incredible number of foreclosures.
The price of houses fell by about 30% during this period. The unemployment rate was 10% in the country, yet over four million houses were sold. This revealed that business was still conducted by those who could still afford to buy houses.
The Covid-19 Recession
Due to the spread of the Covid-19 virus, this short downturn lasted for just two months from February 202 to April 2020. The restrictions lead to a decrease in employment rate and a quick but sharp economic downturn. The aftermath was felt after this period.
The sales of homes across the country dropped in April and May to the lowest they have ever been since the Great Recession. There were fewer buyers on the lookout for houses, and there were fewer sellers ready to sell. Thankfully, there was a rebound in the summer.
Advantages of Buying Real Estate in Recession
So far, we have discussed the relationship between real estate and recession in previous years. Now, it is time to consider the advantages of doing so should we experience one soon. You can visit https://www.usbank.com/ to find out if we’re at risk of a recession. The information you get here will determine if you can invest in the market during this period.
Lower Purchase Costs
During an economic downturn, the cost of real estate is usually cheaper. The reason is that there are few individuals with spending power. So, if you have the money, it is a great time to purchase because you get the property for a cheap price.
Diversified Assets
Stock markets are usually hit the worst during a recession. If you have investments in the stock market, turning your attention to real estate is a great way to diversify your assets. Furthermore, it allows you to protect your wealth.
Reduced Competition
Recessions are not periods where folks are thinking of investing in properties. The only folks who think that way are usually professional real estate investors. What this means is that the competition is less. Therefore, you do not have to compete with others to secure an asset.
Disadvantages of Buying Real Estate in Recession
The advantages are great and all, but you also need to consider the disadvantages. We will look at them briefly to help you decide. Here we go…
Increased Interest Rates
During an economic downturn, loan interest rates are usually high. So, if you do not have the money and you are thinking of leveraging on loans, you will need to pay more because of the interest rates. Furthermore, lenders are pickier when giving out a loan. So, if your credit scores are not very high, you might not get the loan.
Increased Financial Risk
Any kind of investment during recessions is risky, and that applies to real estate as well. Therefore, before you purchase, ensure that you have stable income streams and adequate cash flow. If your financial strength is affected in any way, you might find yourself in a world of financial hardship.
Fewer Individuals Selling Homes
Another problem you might encounter is getting someone to sell their homes. Since there is a decline in the price of homes, individuals know that they will not get a profit from selling. Therefore, they know that buying a new property will be more expensive, so they will not be willing to sell.
Conclusion
Investing in real estate during a recession is a risky venture but still profitable if you know what you are doing. Knowing the advantages and disadvantages of this investment is a great way to determine if it’s an option to take. Therefore, the article above has the information you need to help you decide.
