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How Do Recessions Impact Home Prices?

Consumers are feeling the pinch of high inflation amid aggressive moves from the Federal Reserve, which leads some pundits to proclaim we’re headed toward a recession. Other speculators might suggest we’re already in a recession – a fact that is difficult to know in real-time, due to the lagging economic indicators used to determine that fact. 

A recession is a marked downturn in economic activity that can become self-perpetuating as declining consumer confidence can lead to layoffs, bear markets, and crippling uncertainty. These periods can have a major impact on home prices, and it’s important to be aware of the potential effects.

Home prices sometimes fall during a recession but not typically. Historically, interest rates have decreased during a recession, but the Fed has been staunchly bucking that trend.

This telling graph from Keeping Current Matters illustrates the housing market’s resilience during the last six economic recessions.

Chicagoland is a highly unique market and doesn’t always follow the usual rules of real estate and economics. This might be the perfect time to buy or sell your property, depending on your specific financial situation and your goals for the future. 

Let’s explore the current market conditions and how these might affect your aspirations of becoming a happy homeowner. 

Understanding the Dynamics

As consumer spending decreases, and economic doomsaying prevails, the housing market can become intertwined with this downward spiral. Potential buyers feel hesitant to make long-term financial commitments and suffer from debilitating purchase anxiety.

Many people remember the Great Recession of 2008 when after an extended period of expansion in the US housing market, several financial institutions crashed and the economy experienced significant distress. 

High-risk or “subprime” mortgages abounded in the years proceeding, which led to a disaster when people found themselves underwater and no longer able to pay. Home prices fell dramatically, and many people lost their homes due to foreclosure or were unable to sell their homes because they owed more than the home was worth.

But mortgage lenders learned their lesson and no longer offer home loans to buyers with a low probability of making payments on time. Requirements are much more stringent, new regulations are in place, and hopeful homebuyers face an array of challenges. 

The current unemployment rate is 3.4% and the US labor market is stronger than it has been in recent history. However, Illinois was one of the states with the largest increases in jobless claims in May 2023. While home sales might be down slightly statewide, we also have a shortage of available inventory in the Chicago area which means a recession could be a boon for buyers. 

A decreased sales volume means less competition for limited inventory, so recessions can exciting create opportunities for savvy buyers. With home prices holding steady or declining slightly, aspiring homeowners may find themselves in a better position to enter the market or upgrade to a larger property. 

Navigating the Impact

The Fed has recently raised interest rates to a 16-year high in a seemingly underperforming effort to tame inflation. Many consumers have less-than-positive feelings about their finances and a fear of what the future may hold. 

There are several key factors that influence the mortgage loan interest rate you qualify for and which loan product is the right one for your particular situation. It’s important to work with an experienced and knowledgeable mortgage lender who can help you explore all of your options.

If you’re a current homeowner, remember that real estate investing is a long-term game and that property traditionally increases in value. In the Chicagoland area, home prices have grown consistently and steadily through all recorded housing history. Even in the post-2008-2010 downturn, home prices recovered and have reached their predictable pricing levels.  

If the current economic environment is affecting your financial stability, there are ways to get assistance and get back on track.

As a potential buyer, it’s crucial that you have carefully assessed your financial capabilities, put aside a healthy emergency fund, and done your due diligence regarding realistic expectations and a deeper understanding of the local housing considerations.

In a still-competitive market like Chicagoland, it never hurts to position yourself as a standout homebuyer. It’s a great time to pay down your debt and clean up your credit rating. Getting pre-approved for a mortgage loan gives you more leverage when it comes to making a successful offer.

Find the Silver Lining

Whether it’s the ideal time to purchase real estate for you and your family depends on several elements, such as your debt-to-income ratio, your employment status, and your credit score.

While interest rates are on the higher side, a common saying in the industry is “marry the house, date the rate” — meaning it might be smarter to buy a home you love now if you can afford it, and refinance as soon as the rates become more favorable. Rents are increasing rapidly all across the country and that’s encouraging more people to consider trying to buy a house. 

While recessions can create anxiety and financial stress, they can also present unique opportunities for prospective homeowners. In a market with potentially lower prices, buyers may find themselves with more negotiating power and more choices. However, it’s important to approach any major purchasing decisions during a recession with caution and thorough research.

Partnering with a mortgage broker who has extensive experience in the Chicagoland market is the best way to ensure you can explore all of your options and take the course that’s right for you. Ready to learn more? Reach out to me today!


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