What is a Recession?

A recession is a period of economic slowdown otherwise known as an economic contraction. Recessions are cyclical and they occur normally just as economic expansions do. However, they can tend to be a bit more memorable since recessions tend to occur a minority of the time and are often associated with “less good” times. During a recession, growth is typically slow, labor force participation and the unemployment rate fall and there is a general friction within the economy. Money does not move as freely and as easily as it might have otherwise and lenders are typically more restrictive when lending out capital. Recessions are important because they will greatly affect your financial plan and knowledge of what to do during a recession can help us prepare for one.

What Happens to Interest Rates During Recessions?

There isn’t always a direct correlation with mortgage rates and recessions. Mortgage rates are a factor of the Prime rate (and the FED Funds rate) and even though the FED will tend to lower rates to get us out of a recession this doesn’t mean that the two are actually correlated. There can be times of economic slowdown and high interest rates, especially if there is inflation in the economy which is not under control.

Buying a Home During a Recession

If you plan on purchasing a home during a recession you will have a lot less competition and demand and you will have more motivated sellers. Due to this you should have more negotiating leverage and you might be able to get a better deal than you might normally. Moreover, home prices tend to decrease during a recession if inventories rise and demand does not keep up with supply.

Borrowing can be much more restrictive during recessions and qualifying for a mortgage can be much harder.

Home prices and mortgage rates tend to have an inverse relationship, so if buyers time their buying correctly and are lucky they can take advantage of this knowledge and a score a great home for cheap.

Debt During a Recession

You should definitely look to avoid debt during a recession at all costs. Ideally you want to go into a recession with little to no debt but their are ways to slash debt during a recession. Debt becomes more expensive to maintain and harder to get out of at a time when cash is king. Those with debt during a recession are usually at a severe disadvantage to their peers.

Trying to time mortgage rates is usually very difficult and since mortgage rates and homes tend to have an inverse relationship this might not always play out to your benefit. You are better off waiting for a recession in the hopes that home prices will come down (not in the hopes that mortgage rates will come down).

Cash is King

Cash is king during a recession and having excess cash on hand is what is going to be what’s your biggest advantage. This especially the case when many are strapped for cash, which is especially true during recessionary times.