Almost the end of 2022, many experts declare that next year is gonna be a year when economic growth slows down. According to a recent survey from CNBC, 70% of Americans predict a recession will occur in 2022, however, many experts predict one will occur in 2023.
Despite slow economic growth, consumer trust has remained constant. Also, despite the stock market's collapse, business revenue is strong. One article from Forbes reveals that inflation is still high. However, the job market is still strong, which is positive.
Regardless of when the recession may occur in 2023, many consumers are concerned about the real estate business, and how the recession will impact the housing market.
What’s recession actually mean? How does it impact the real estate business?
The definition of Recession
According to Forbes Advisor, recessions are marked drops in economic activity that can last for several months or even years. Experts declare a recession when a country's economy faces negative gross domestic product (GDP), growing unemployment, declining retail sales, and contracting income and manufacturing indicators over an extended period.
Further, recessions are regarded as an unavoidable component of the economic cycle or the predictable pattern of expansion in a nation's economy.
The impact of Recession on the real estate industry
In the form of the real estate industry, supply and demand are the primary factors that will maintain the real estate market's steady, upward trajectory, according to Forbes Advisor.
Rick Sharga, executive vice president of RealtyTrac stated that another reason why housing experts predict that the market will continue to be strong for years to come is the extremely low supply, which is also helping in driving demand and higher property prices. Home prices are rapidly growing because of the imbalance between supply and demand.
And it will take home builders at least a few years to generate enough new supply to balance the market after not building nearly enough homes for the past ten years.
The data from the National Association of Realtors reveals the proportion of millennials and Gen Z making up half of the country's population as of July 2019. It is noteworthy because first-time homebuyers comprise the greatest share (31%) of those buying houses.
The demand will continue to be high, especially since most first-time buyers are under 40, considering the historically low level of housing supply. There won't be a reduction because the home market's inventory has barely expanded during the previous ten years.
Polina Ryshakov, senior director of research and head economist at Sundae, a real estate marketplace for distressed properties stated that Gen Z would hit 30 and be more ready financially to buy a home than Millennials were at that time in a few years. This indicates that the demand for housing will remain at or above its current level while supply will continue to lag behind.
Further, as a seller, the home recession may need you to adjust your expectations. High pricing may prevent some prospective buyers, so maybe you couldn’t receive the takeover bid you were hoping for. Potential buyers can expect additional repairs from you if your house is on the market for a long time.
As a buyer, you must know that there is a limited supply and higher interest rates. If you're just considering real estate as an investment, you may want to look into other asset classes as the uncertainty will likely last for an uncertain period of time.
One article from JPMorgan showed the impact of recessions on Real Estate assets. Greg Reimers, Real Estate Banking Northeast Market Manager for JPMorgan Chase stated that recessions have the potential to decrease the demand for real estate assets. Different types of properties have different impacts. Here are the details:
- Multifamily properties: Renting is becoming more popular among many would-be single-family homeowners, increasing demand for multifamily properties.
- Affordable housing: Affordable housing is highly demanded and remains strong for types B and C properties.
- Industrial properties: Consumer spending reductions may have an impact on industrial properties that produce elastic items.
- Retail properties: Types B and C of Malls may be struggling. Hence, the evolution of omnichannel and experiential retailers will be relevant in the future.
- Office buildings: Types A office buildings, which provide a variety of amenities, continue to operate efficiently even with a limited number of vacancies. But during a recession, businesses can see B and C properties as a way to save costs.
Types A properties stand for the highest quality building in the market and area, it is professionally managed. Types B stands for the lowest quality from Types A, and it can be well-maintained. Besides, type C is typically more than 20 years old and not in a strategic location.
Is it safe to buy a house during a Recession?
Photo by Markus Winkler on Unsplash
You may want to wait to buy real estate until the market stabilises due to the high-interest rates and the rising cost of building in order to avoid being stuck at a higher interest rate on a home that you pay more for than the market rate.
However, if you see that property prices are decreasing and you happen to have a sizable down payment saved up for your home, you may want to seize this once-in-a-lifetime chance, according to Forbes.
Some of the benefits of owning real estate include the following below:
- A 30-year mortgage is an investment that protects you from inflation. Rents will increase, but until you refinance to a cheaper rate, your 30-year mortgage will remain at the same rate.
- Owning real estate has tax advantages.
- Real estate prices are likely to increase over a period of time.
- As you pay off the debt, you gain equity in the asset.
- Owning a home has a practical purpose since you need a place to live.
Conclusion
The real estate business will likely face challenges both for sellers and buyers. As buyers and sellers, both need to prepare for a recession. Starting from the finances, housing plan for life, etc.
Moreover, the real estate business owner can provide the best service by doing a digital transformation. It allows your business to grow more leads, have more exposure, and of course, generate more profits. As we know that the digital world is rising, so by transforming your real estate business, you can be prepared to face the challenges in the digital market. At VirtualSpirit, we’re ready to help you stand out in the real estate business. Book us a call now.
