I have an offer on my apartment in Chicago. On the one hand, I was pumped when someone was willing to pay 20% more than what I bought it for in 2015. On the other hand, my goal was to raise a family there with my future spouse. But the offer was too good to pass, so I signed on the dotted line.
With so much talk of an impending recession, why buy real estate now? Let’s discuss some key points to help potential buyers (like you) make better decisions.
1. Real Estate is Cyclical
From New York to San Francisco, the real estate market across the country has softened. If you buy property in a softening market, expect real estate prices to stay flat or go down for the next 3-5 years. If you buy now, you will not catch the bottom. So I would hold on a little bit before making a purchase.
It takes around 5 years for the market to work through inventory and find price stability. There are always delusional sellers in the first couple years who believe they can still get peak prices. It is only after seeing their property stay on the market for months that they acquiesce to lowering their price.
2. Real Estate is Seasonal
The best time to buy property is in the winter (Nov to Jan). The weather is terrible and nobody wants to move during the holidays. Sellers who list during the winter are generally more motivated to make a deal.
As the weather gets better and people get paid their bonuses, the real estate market heats up during the spring and summer.
Take a look at housing data from the Census Bureau and Zillow. If you want to buy a house ahead of a potential recession, the 4th of each year is the best time of the year.
|Month||Median ($)||Average ($)|
3. New Year’s Resolutions
Why does the real estate market heat up in the 1st quarter of every year? It is the same reason why Million Dollar Tips receives more traffic in the Q1 than 2, 3, or 4! Hope and goal setting! Since owning real estate is one of the best ways to build wealth, buying it is always one of the most popular financial moves.
As people come back from the holidays and get paid their bonuses, they get motivated to make positive changes in their lives. It is the same reason why the government forces us to pay our taxes by April 15th. If you want to sell property, best to list in the 1st half of the year when people have money and are looking to buy.
4. The 3/30/30 Rule
The homeowners who suffer most during a recession are those who paid too much on their house. If you are a buyer, follow this conservative buying rule: 3/30/30.
3: Buy a property no greater than 3X your annual income. You can always refinance your home, but you can never change your initial purchase price!
30: Spend no more than 30% of your income on your monthly mortgage payment.
30: You should have 30% of the value of the home saved in cash. 20% is for the down payment and the other 10% is for a cash buffer.
5. Pay Cash for a Property
If you can pay cash for your house, then you are in the best house buying scenario if we enter a recession. Being a cash buyer also gets you the best price possible. Not having to depend on a bank for a loan can easily shave off 1-5% from another offer who requires a loan. Cash buyers can offer quick closes that can get them a lower price.
If your property declines by 20%, you will only be down 20%. Having a paper loss of 20% may not feel pleasant. However, it is better than putting 20% down and losing 100% of your equity.
6. City Locations Suffer Less
The further you have to commute to the center of a major city, the more likely your home price will drop. Vacation properties will suffer the most, so avoid buying vacation properties until a recession hits and prices drop. Finally, large properties such as mansions will also suffer.
Heartland real estate may outperform coastal city properties with low cap rates. However, every area in the U.S. will be impacted by the recession. The only difference will be the magnitude of the declines.
If you must buy now, focus on the best location possible. Look to buy property priced no more than 20% of the median price in your area. You can find the median price using Zillow. If you want to save money and get a deal by buying a property further out, you should wait until a downturn hits.
7. Buy and Hold for the Long Term
If you buy now, you will be fine so long as you keep paying the mortgage and property taxes.
Life goes on during an economic downturn. Recessions only last for 12-18 months. If you can’t hang on and decide to foreclose, you will lose 100% of your down payment. You also hurt your credit score.
Think of home ownership as an investment and a way to improve your lifestyle. If you end up making money over the long run, that is fantastic. If you follow these rules, you will have no problem doing so.