How a Recession Helps First-Time Home Buyers

Catching a Break?

For the past two-plus years, sellers ruled. Buyers had to race for homes that entered the market only to be gone within a day or two.

But talk of a looming recession has changed buyer attitudes. Now, the average home is selling below its list price, and that hasn’t happened in a long time, as Bloomberg reports.

The housing market is in reset mode, as the economy has entered a “growth recession” phase — maybe not a full-blown recession, but an obvious financial slowdown.

It’s not all bad news. Finally, some first-time buyers expect to get a break.

First-Time Buyer Edge: Freedom to Move, Without Having to Sell

Some potential buyers already own homes. They’ll need to sell them to buy new ones. That’s an advantage for first-time buyers who don’t have that challenge.

At the same time, these first-ever home buyers are getting some real options — and a bit more time to choose wisely from those options.

Why? When the economy slows down, so does competition in the home-buying arena. Bidding wars are fizzling. Some homes linger a little before they’re snapped up.

Let your mortgage specialist know you’re a first-time home buyer. You could be eligible for state incentives, federal financing, and special tax benefits.

Finally, first-time buyers are gaining real leverage. But that doesn’t mean it’ll be easy to get a mortgage.

The Importance of Good Credit in a Recession

During downturns in the economy, banks and credit unions lend more cautiously. Borrowers in today’s market will need strong credit profiles and might need good-sized down payments to qualify.

Credit scores don’t just matter to lenders; they help buyers get the best available interest rates. Why? Because if you’re prepared to pay a large down payment, your lender assumes a smaller risk of your defaulting on the mortgage. In return, you get to borrow money at a more favorable rate.

And there are some actions mortgage applicants can take to fortify their credit profiles.  

Getting ready to apply for a mortgage? Here are the best ways to rev up your credit score.

What is the lender really looking for? A pattern of paying off bills. A pattern of prioritizing money-saving. The discipline and resilience necessary to take on a mortgage in the midst of uncertain times.

Wages… and What Else?

Mortgage lenders are also especially vigilant, during a downturn, about several factors in an applicant’s financial profile:

  • Job record: The strongest applicants have held onto their jobs for more than two years. This is true whether they are self-employed, working in the gig economy, or earning W-2 wages. Applicants who have changed income sources in the past two years should, if possible, work on a statement about how those sources of income are connected — showing a continual ability to earn, now and years into the future.
  • Savings to last through potential jobless periods: Applicants with financial assets that could help them weather financial turbulence present less risk to lenders than those ready to deplete their life savings to buy a home. This might seem counterintuitive. When you want that home, and want to demonstrate your commitment to paying for it, it feels like it’s time to empty those savings accounts. But lenders don’t let borrowers use up all their funds for a down payment.
  • Multiple income streams: A pair of co-borrowers can be highly reassuring to lenders. The same goes for wage earners who also earn royalties or otherwise draw additional, steady income streams. Applicants with multiple income streams have that much more of a cushion if their wages falter. In economic downturns, multiple sources of future funds can make a difference.

Alternative incomes from home-sharing, investment properties, or trusts also matter to loan underwriters. Many buyers can point to more types of income than the traditional flow of wages. Today, first-time buyers are free to think of themselves as more than their W-2s.

But Is Buying Real Estate Really a Good Move When the Economy Is Uncertain?  

Property prices are always fluctuating. And a home purchase always carries some degree of risk. But with rents as high as they are today, buying can bring safety and stability, too. Over time, buying a home is a tried-and-true way to save money.

Still, it’s important to point out in the midst of this slowdown, home prices could actually drop. Why? Rising interest rates around the world are making loans harder to get, and that’s making housing harder to buy. So while bidding wars are not dead yet, sellers are making concessions and prices are cooling.

The market is facing a “painful reset,” as Bloomberg reports. Rob Subbaraman, who leads global markets research at Nomura Holdings Inc., is quoted by the financial news source:

Young families that have taken on debt have never experienced in their lifetime a sharp rise in interest rates at a time when their real, inflation-adjusted wages are falling. This could come as quite a shock to them.

So far, the market is being helped by interested first-timers who have the savings (or the helpers) to enable them to buy homes. These buyers have helped to keep real estate prices high. When their demand begins to wane, lower home prices could follow.

What does this mean, in plain terms? First-time buyers should be sure they really want to be owners, and are ready to keep their homes for several years. If a recession dings home prices, first timers could be dealing with special stress. They haven’t had a lot of time to build equity in their homes. Those who hold on to their homes for 5 to 7 years or longer will likely see the market recover — and housing markets generally do recover quite nicely.

 Buyers entering the market during a time of rapid inflation could wonder if their timing is off. Here, it’s helpful to consider how buying a home can offset inflation.

Overall, the current situation calls for carefully budgeted purchases. Those who can put down 20% are, of course, in a stronger position to weather a downturn than those who go in with a low down payment.

Take It Away, First-Time Home Buyer!

So there we have it. The lull in the current market opens up doors for hopeful buyers — at least those who can demonstrate that their income will continue, so they’re good for repaying their loans. And a first-timer keeps an agility advantage whenever it gets harder for current homeowners to sell.

First-timers should be sure they want to buy real estate and hold it, though. It’s possible that today’s buyers will be watching a market that dips for a while before it rises again. If a pattern that’s a century in the making holds up, then the market will indeed rise again.

Supporting References

Leslie Cook for The Charlotte Observer: Why a Recession Could Help Homebuyers — Plus 5 Tips for Buying During a Downturn (Aug. 8, 2022).

Enda Curran and Ainsley Thomson for Bloomberg: The World’s Hottest Housing Markets Are Facing a Painful Reset (Sep. 11, 2022).

Jim Akin for Experian.com: Is a Recession a Good Time to Buy a House? (Jul. 24, 2020).

And as linked.

Photo credits: Ketut Subiyanto and RODNAE Productions, via Pexels.