Should You Buy a Home During a Recession?

By Dawn Handschuh, Personal Finance Writer Archive

Buying a new house is always a weighty decision, but a recessionary climate and plummeting home prices can sometimes skew your priorities without your realizing it. Depressed market values can make it appear that bargains can be found around every corner. While they do exist, take a moment to review your reasons for buying, and your personal circumstances, before you take the plunge.

The good news for house-hunters is that it's a buyer's market. The marketplace is saturated with unsold inventory, and thousands more sellers are likely sitting on the sidelines waiting for a pickup in sales activity before listing their homes. In a buyer's market, house-hunters have more leverage to negotiate all terms of the sale, including, most significantly, the sales price.

As for financing, mortgage rates remain at historic lows. As of February 18, 2009, the average 15-year fixed rate was 4.93%, while the 30-year fixed rate average was 5.27%.

While mortgage rates remain low, there is a catch. Qualifying for a mortgage may not be the slam-dunk it once was. Tightened credit markets have created new challenges for would-be buyers. Expect lenders to hold you to higher thresholds for credit scores (the best rates go to those with credit scores in the mid-700s and higher) and personal income as well as meaningful down payments. Zero-percent down payments have fallen by the wayside.

Don't buy a house simply because the price is too good to pass up. Your home-buying decision should always hinge on whether this home meets your needs and whether you can afford it.

Tips for first-time homebuyers

• If you have no other property to sell, you're sitting in the catbird's seat. Your new home purchase isn't contingent on selling your old home, so you can afford to scour listings, be choosy (for as long as your realtor's patience lasts) and pull the trigger only when you find the perfect place.

Tips for existing homeowners

• If you're a homeowner who believes that home prices will likely continue to fall and you can arrange for temporary housing (such as a short-term rental or moving in with family), you might do well to sell your existing home now, wait a few months and then buy your new home a little further down the road.
  
• If you're a homeowner who wants to trade up to a bigger house, you can still profit by buying during a recession because the price break you get on your new, more expensive house will offset the loss on the sale of your old house.
  
• When guessing what your house might sell for in a recession, don't be of the mindset that the $50,000 price reduction you'd need to make in order to sell the house means you'd have to suck up a $50,000 "loss." A more realistic assessment is to calculate what you originally paid for the house and what it could sell for now. If you're a long-time homeowner, chances are you'll be quite pleased.

Tips for every buyer

• If there's one thing the sub-prime mortgage crisis should have taught us, it's that buying a home is never a good idea if you really can't afford it.
  
  But there's another risk ⎯ the risk that you'll lose your job after you clinch the deal. While this can happen at any time, a recession raises the stakes because if you get laid off, the competition for what few jobs are available will be fiercer. The bottom line? Only pursue a new home purchase if you have a substantial cushion of savings and solid job security. Don't stretch to buy a home that's even slightly beyond your reach or more than 35% of your gross monthly income.
  
• As you house-hunt, keep an eye on home mortgage rates. Remember that any upward rate change of a half-point or more could have a major impact on home affordability.
  
• While you don't want to alienate sellers by being too demanding, you can use your leverage in a buyer's market to lowball your opening offer or ask for extras. Most sellers who can afford to wait out the market downturn are doing so, so you can bet that those sellers who were forced to list now for whatever reason will be willing to negotiate. Use your best judgment to strike the right balance.
  
• If you're willing to deal with additional legal requirements, foreclosed properties offer additional savings. Since foreclosed homes are owned by the banks that issued the mortgages, they're often sold at below-market rates so the lenders can achieve a quick sale and recoup what they can. Foreclosed properties are nearly always sold "as is," without a warranty.
  
• If your purpose in buying a home is to have a place to live, a recession is a great time to consider this as a long-term move that can also provide you with security, a place to raise a family and the joys (and challenges) of home ownership.
  
  2009 is not a good time to "flip" property for profit, though. No one can predict how long the current recession and concurrent depressed home prices will last, so plan on staying put in any new home you buy for at least three years.

The uncertainty of today's economy can make some people freeze in their tracks, afraid to make any move. Overcome your indecision by being an informed consumer and knowing the risks and potential rewards of a well-timed real estate purchase.