The country entering a recession in 2022 was definitely a topic in the back of many americans minds, as inflation rose and GDP fell. In response, the Federal Reserve has drastically raised interest rates. While this is primarily intended to battle inflation, it also has an impact on other sectors of the economy, particularly the property market.
Interest rates are not directly tied to mortgage rates, but typically, as the one increases, so does the other. The result of pricier mortgages is a slowing housing market, with fewer buyers.
If you’re a real estate investor, do these conditions raise any benefits for you, or will they add challenges?
Are we in a recession?
While the country did show declining economic growth for Q1 and Q2 in 2022, we have seen marginal growth since then with positive growth rates for the end of 2022. And while this year showed some level of growth as well, this metric isn’t the only factor that can indicate recession.
So while we aren’t currently in an active recession, many raise the question of whether one can be on the horizon. According to ‘Estralla & Mishkin’ the current US Recession Probability is at 67%, with a higher long term average at 14%.
How does a recession affect the real estate market?
Although the real estate market is more immune to negative effects of a recession than some industries, the effects are still felt in a number of different ways.
Mortgage Rates: Historically during a recession interest rates drop across the board. This makes purchasing and refinancing advantageous.
Real Estate Prices: Because the amount of qualified buyers and overall demand falls during a recession, the overall price of real estate drops.
Rentals: The previous point has a negative impact on any landlords, as rent drops and overall ability for renters to pay falls as well.
In an effort to slow recession, the federal government has been increasing interest rates, and we are currently sitting at 5.25%. This means an overall decreased ‘buying power’ for those in the market for property, ultimately having an exponential effect on limiting the pool of buyers for higher tier real estate.
To buy or not to buy?
All of this information raises the question of whether to buy real estate now, or wait for lower interest rates. The caveat with this is, ofcourse, we cannot see the future. While the prospect of a potential recession is inevitable, it’s extremely difficult to predict when it will happen.
