Those new to the real estate market might find it confusing and hard to predict. This can cause people to hesitate about buying a home when they see headlines with terms such as “inflation” or “recession.”It’s easy to forget that real estate markets are cyclical, but annual real estate cycles create the same inventory and buyer patterns every year. The economic cycle also has stages that form predictable patterns, although it takes years to reach each stage. In this article, we explain how the stages of the real estate cycle and economy work together. We also show how a recession can be beneficial for home buyers.
Keep an Eye Out for Yearly Changes
The four stages of the annual real estate cycle are very predictable:
- Spring is the busiest season for home buying and selling, but if you’re looking to buy a house, prices will be higher due to less inventory. However, some sellers might be more willing to negotiate since their homes have been on the market for longer than they anticipated.
- During the spring months of April to June, temperatures are warm and motivating for buyers as well as sellers. Although there are more buyers during this time, leading to more competition amongst sellers, sellers still have an advantage when it comes to price. However, at this time of year buyers also have a wider variety of choice.
- Prices from July to September are more reasonable as the housing market is slightly calmer than usual and people are less eager to list their homes. This means that houses stay on the market for longer, giving buyers more power in terms of price negotiation since sellers worry that their homes won’t sell until autumn. So summertime tends to be ideal for those looking to buy a property; there’s a wider selection available and agents are often keener to agree on a lower price.
- From October to December: Not only do temperatures drop, but also the number of houses on the market declines. Although buyers might be less interested in residences that have been lingering, sellers are often more willing to accept lower yet reasonable offers so they don’t have to list their property again come springtime. With fewer people looking and homes available, this presents an opportunity for both parties involved – as long as sellers don’t mind seeing prices around fair market value.
The annual cycle provides an understanding of when it is best to buy depending on what you prioritize, lower prices or more choices. If saving money is most important to you, stages 3 and 4 are the best time to purchase, whereas if having plenty of options is more your style, stages 2 and 3 would be better suited for you. Stage 1 still has some advantages even if you aren’t too choosy. Although low inventory can lead to steeper prices, there are also fewer buyers during this stage which could result in sellers being open to negotiation.
Reading the Economy
Next, here’s how the economic cycle impacts real estate:
- When the economy is strong, unemployment rates are low, and buyers are searching for homes in high numbers, it creates what we call a “sellers’ market.” In this type of market, vacancies become increasingly rare which drives up competition and prices. Although it may feel like there are fewer homes on the market during this phase, actual inventory levels don’t change much. It’s more that the number of buyers decreases while demand remains relatively steady. From a buyer perspective, this stage is often the most difficult because going against other bidders becomes commonplace.
- With an abundant housing market and few buyers, Hyper-Supply creates a buyer’s market where house prices drop due to the lack of demand. Furthermore, too many homes can lead to devastating job loss in the home-building industry as construction begins to slow down.
- The recession has created a buyer’s market in terms of real estate. With more homes available and fewer buyers, prices are lower than normal. This presents an opportunity whether you’re looking for a home to live in or an investment property. Investors are eager to take advantage because renting covers their expenses while they wait out the recession, after which they can expect their equity to grow along with the economy. The downside is that there is increased risk of job loss and higher interest rates during this time period.
- As the economy slowly improves, now is not necessarily the best time to buy a house. Although rates are low, demand is high, which means prices will continue to rise. By waiting and watching the market, you can take advantage of potential drops in interest rates and increase your negotiating power when inventory levels are higher.
A recession is often the best time for real estate investors and homebuyers to swoop in and take advantage of more flexible budgets.
Where We Are Today
With inflation rising at an unprecedented rate, the government had to take action to keep it under control. And what did they do? They raised interest rates. Higher interest rates discourage consumer spending and help reduce debt levels. However, this also often leads to recession because less spending means businesses make less revenue. Higher interest rates tend to scare off potential buyers who are worried about increased monthly payments. However, higher rates also lead to inflation and housing price drops – which can be a good thing for savvy shoppers. If you have some flexibility in your budget and a reasonable down payment saved up, you may be able to find a balance between higher interest rates and lower prices. Additionally, when it comes time to renew your mortgage, you should see your interest rates drop – meaning your mortgage payments will become more manageable and you’ll build equity faster.
Where We’ll Be Next Year
The government’s only method to battle inflation is through increasing interest rates, but research indicates there will be a recession in Canada by late 2022. Although it’ll be modest, businesses and jobs will start recovering by early 2023. The silver lining here is that the shorter the recession period, the fewer job losses we experience. However, if the recession is short-lived, we aren’t as threatened by that risks. If predictions are correct, prices for housing will drop up to 15% in 2023’s second quarter. Based on the annual real estate cycle, this would be perfect timing. By summertime, when things have cooled down and prices are at their lowest point already , a 15% price reduction would make properties very appealing .
Looking back can help you prepare for the future! Check out our blog about past trends in the Toronto real estate market to get ahead of the competition.
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The Bottom Line
Right now is an excellent time to buy a house because prices are low and fewer people are buying. Since there are more houses available than buyers, sellers are open to negotiation. You’re in a great position if you’re thinking about buying during or after a recession for the following reasons:
- You can see things evening out between your interest rates and the lower purchase price, making it easier to manage your mortgage.
- With lower prices, your down payment will go further. This way, you have the opportunity to buy in a nicer neighborhood or get a bigger home.
- By buying now, you’ll pay less and end up with more equity when prices rebound after the recession.
- When interest rates are low, it’s a great time to refinance your mortgage. You can extend your terms to make your monthly payments more affordable or even put that extra money towards a lump sum payment at the end of the year to pay down your mortgage faster.
A recession offers a balanced market ideal for real estate investors and homebuyers working with a more flexible budget.