What Happens to Real Estate During a Recession?
It is almost impossible to give a precise date to the history of the real estate market. This is considering how real estate transactions have been happening for a very long time. However, it is easier to take notice of specific eras of this industry.
For example, there is such a thing as the real estate bubble of the early 1900s. This period was impacted by several happenings, including the gold rush.
Well, the industry at large has been impacted by economic recessions at various points in time. The question is what the fate of the industry is during such periods. This article will address this topic. So, read on to find out more.
How Economic Recessions Usually Affect the Real Estate Market
A lot of industries and activities are usually adversely affected during such periods. Some even experience a standstill, depending on the intensity of the economic recession. By and large, some of the ways that the real estate market is usually affected are discussed below:
Reduction in Housing Sale
Property purchases are usually capital-intensive. This is especially true when they are situated in strategic areas. As a result, people who make such purchases are supposed to be financially buoyant enough to do so.
Another option, which is pretty much common, is taking out a loan to facilitate such a purchase. Well, it turns out that taking out loans during a recession is more difficult. These in turn affect the amount of real estate transactions that can be concluded.
Of course, sellers are also affected. This is because the chances of selling properties and earning profit by doing so are significantly reduced. Besides the fact that it is harder to record sales during such periods, sellers are usually affected in another way discussed below.
Property Value Depreciation
The real estate market is fond of experiencing value appreciation, more often than not. This simply means that the value of properties rises after some time. However, have you ever imagined why this is often the case?
The law of demand and supply is one of the several reasons for this. The fact is that everyone needs to use real estate services, directly or indirectly. This can come in the form of buying, renting, or even leasing a property.
Demand usually exceeds supply, which is one of the several reasons these properties experience value appreciation. However, the tables turn during an economic recession. The reason is that most people are not financially buoyant enough to afford real estate properties.
There are also challenges in terms of securing loans for this purpose. These factors combined reduce demand. The reduction in turn causes value depreciation. In simpler terms, this means that there is usually a decline in the value of these properties.
Distress Sales
A lot of people find themselves in financial hardship during an economic recession. Possible reasons for this include:
- Job loss
- Difficulty securing employment
- Reduction in business investment
- Credit crunch
- Reduced consumer spending
- Instability in the financial market
- High debt levels
- Changes in fiscal policies
The above-listed and a few others are possible reasons why people experience financial hardship during a recession. As a result, some people consider selling acquired real estate properties.
Some of these people will be willing to sell for way beyond the market value. This is as a result of the distressed nature of the sale.
Fewer Constructions
The situation usually proves very discouraging for real estate enterprises. As a result, many of them are not willing to embark on new projects. Some even have to bring some ongoing projects to a standstill.
Consequently, this impacts the supply capacity of the real estate market. This is especially true in the long term.
Increased Foreclosure
Many debtors find it hard to service their debt and generally adhere to their loan conditions. Those who took out secured loans can lose their collateral during such periods. Frankly, this usually turns out to be a common occurrence during an economic recession.
This is especially true if the adverse economic impact is very intense. Speaking of losing collateral, it turns out that many people borrow against the value of acquired real estate property or its significant equity. As a result, there are common cases of foreclosures.
Increase in Renting Practice
There are three options when it comes to using real estate properties. The options are buying, renting, or leasing.
Renting is the least capital-intensive of the three. As a result, most people end up renting instead of buying or leasing.
Those who rent out these properties during such periods stand a chance of making a profit. You can learn more about the advantages of investing in rented properties during this period. However, this does not rule out the fact that financial hardship is prevalent and impacts people’s purchasing power.
For example, rental price decline can be experienced as a result of businesses cutting back on their use of commercial office spaces. So, you should also bear this in mind.
Government Intervention
The situation can get so intense that people need some sort of bailout from the authorities. As a result, the government may intervene in several ways, including through:
- Job creation
- Unemployment benefits
- Tax cuts
- Interest rate reduction
- Quantitative easing by the central banking authority
In addition to the aforementioned, interventions can also come in the form of mortgage relief programs. Incentives or subsidies to help the real estate industry are also possibilities.
Should You Invest in Real Estate During an Economic Recession?
There are possible advantages of investing in the real estate market during an economic recession. However, these advantages are more long-term than short-term. So, people who tread this path must be willing to exercise a lot of patience.
So, it should not be seen as a get-rich-quick scheme. The advantage of investing during this period is that you can buy very cheaply.
As a result, it is possible to sell for much higher over time.
Conclusion
Economic recessions are usually a hard time for many people and industries. The real estate market usually experiences its fair share. However, there are prospects for investors even during this period. By and large, expert opinions have to be sought to ensure that the right decisions are made.
