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You'd been saving up for and dreaming about your new home. And just as you were ready to get serious about shopping, in came a recession. Maybe you’re now second-guessing whether such a big purchase is a good idea right now or thinking about postponing. You might be feeling the same way if you’re in the market for a new car, too.
Buying a home or car during a recession can feel like a questionable undertaking, but you may not necessarily have to put it off. In fact, in some respects, an economic downturn might make this a favorable time to purchase big-ticket items for certain buyers.
But you’ll want to do your homework (as always) and take into account some of the changes this recession has brought that may impact your costs and financing options.
Ahead, we’ll review a few things you’ll want to consider if a home or car is on your shopping list.
You’ve probably plotted out your new home’s must-haves – a room for your home office or outdoor terrace – and have also given thought to the financial aspects of homeownership as well.
Before you buy a home during a recession, you’ll want to take a look at your income, job security, and cash reserves. It’s always a good idea to do a financial review before becoming a homeowner, of course, but in today’s shaky economy, you’ll want to be extra sure your financial footing is solid.
Money-wise, this recession has resulted in a few changes to the housing market, some that might surprise you. Let’s jump in.
During the last economic downturn (2008 - 2009), housing prices fell 33% on average, according to research firm CoreLogic. So, housing prices must be falling now because we’re in a recession again, right?
Actually, we’re not seeing a similar trend. In June 2020, the national average listing price was up 5.1% from a year ago, according to a report from Realtor.com.
In some cities, the report found that the price of homes increased even more than that: The median listing price in Los Angeles jumped 21.4% from last year and was up 23.8% in Pittsburgh. But not every market experienced a price hike. Home prices decreased in the Miami area by 2.3% and by nearly 1% in Dallas-Fort Worth-Arlington, Texas. Take note, bargains may still exist in some cities.
In many cities, current supply and demand for homes is playing a role in pricing. Through the first week of June 2020, housing demand was 25% higher than it was before the pandemic in January and February, according to real estate brokerage firm Redfin.
People who were looking to buy in the spring might have put their plans on hold because of the pandemic, so both spring and summer buyers are currently on the hunt. But there are also less homes on the market now compared to last year, and the high demand coupled with low supply might be driving prices up in many areas.
The bottom line: Just because the economy is down, doesn’t mean home prices are, too. In many markets, you may have to look a little harder to find a good deal or you could expect to pay a bit more.
Although it can be tough to score a deal on home prices right now, there is at least one aspect of home buying that could be favorable in the current economy, and that’s mortgage rates.
According to mortgage loan company Freddie Mac, rates for 30-year and 15-year fixed rate mortgages dropped below 3% – to 2.98% and 2.48%, respectively – for the first time in 50 years during the week of July 16, 2020. This could be advantageous for certain borrowers, even if you’re considering buying in a seller’s market.
Here’s why: Say you wanted to buy a home listed for $400,000 last year. During the week of July 18, 2019, the estimated 30-year-fixed mortgage rate was 3.81%. If you qualified for the estimated rate and purchased that property with 20% down ($80,000), your principal and interest would have been $1,492 per month on a loan of $320,000.
This year, maybe you’re considering a home for $425,000. Twenty percent down on that house would be $85,000, making your mortgage $340,000. With a 30-year fixed mortgage rate of 2.98% (again, assuming you qualified for that rate), your monthly payments would be $1,429. So, even though you are borrowing $20,000 more, you’re paying roughly $63 less per month as a result of the lower rate.
That being said, mortgage rates are just one piece of the puzzle: You might find that your housing costs are higher when you factor in things like property taxes and homeowners insurance.
Homeowners looking to buy a second home right now may be faced with a mixed bag of opportunities. On the one hand, if you’re thinking about buying a property to rent out, you could find eager tenants. For the most part, even with the coronavirus pandemic, the rental market has been holding up reasonably well.
A majority of people who were apartment-hunting haven’t changed their plans, and are still searching for a new place to live, according to a RENTCafé survey.
Qualified buyers looking to purchase rental properties or second homes may benefit from those low mortgage rates we mentioned earlier, too. If you're thinking of financing any part of your investment property, lower rates could make it more affordable to do so.
On the flip side, buying an investment property during a recession could come with its own challenges. Investment homes tend to have stricter lending guidelines. On top of that, some lenders have recently upped borrowing requirements to minimize lending risks during economic uncertainty.
Many lenders are requiring higher credit scores, bigger down payments, and more cash reserves before they'll provide a loan. This change doesn’t mean getting an investment property during a recession is totally out of the picture, but you may have to save up a bit more than usual if you’re considering a second home or rental space.
Whether you’re buying your first (or third) set of four wheels, car buyers may be able to find some recession-related deals right now.
Before the recession, it was typically rare to find 0% financing deals on cars. Now, many car companies and dealerships are offering 0% APR on loans of three to seven years.
Although a 0% interest rate for a car sounds like an unbeatable offer, keep in mind that some manufacturers won’t honor other perks like cash-back bonuses when you borrow at 0%. You could even end up paying more if the interest savings are less than any upfront incentives.
If you have to choose between the low interest rate and the rebate, do the math (taking into account how long that low APR lasts and how much time you think you’ll need to pay off the car) and see which option makes sense for you.
Some dealers are also offering deferred payments for a few months. Again, check the details, since select loans may accrue interest during a deferral period, while others may waive them entirely.
You may already have the cash you need to buy a car. Still, with such low interest rates, you could be wondering if it’s better to take out a loan to finance said car and stash the money toward other savings goals you might have.
Here’s how it could play out: Let’s say you had $25,000 in cash ready to buy a car, and you’re quoted 0.9% APR on a loan.
Taking out a loan and putting that money toward your retirement accounts, or investing it in the stock market, could potentially work in your favor. That’s because if over time, those accounts earn a return higher than 0.9%, you could actually make money on that cash as you pay off your auto loan. (Though keep in mind nothing is guaranteed with investing, and you have the potential to lose money as well.)
Still, there are times when you may want to skip financing. By paying for a car upfront, you eliminate monthly payments and you may become eligible for a hefty cash-back deal. Cash-back deals typically either come in the form of a check from the manufacturer or are added to your down payment, essentially reducing your purchase price.
Some car manufacturers are currently offering as much as $9,000 in savings, but like we mentioned earlier, cash offers typically can’t be combined with special financing deals. If these incentives outweigh potential earnings from a savings or investing account, then it may make sense to pay cash if you have it.
If you’re looking for a house or car right now, you don’t necessarily have to put your big purchase on hold. Depending on your local market and financial picture, both the housing and car markets can offer incentives for qualified buyers who are ready to get the keys to their new space or wheels. But while there might be deals abound, especially on interest rates, it’s a good idea to carefully go through your options and read the fine print, as some lending terms may have changed.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.