How the Recession Affects First-Time Home Buyers

A first-time home buyer in time of recession, whether looking for a home now or having bought their first home before a downturn, is affected by a slowing economy.

Less Expensive Homes

A recession occurs when the nation's Gross Domestic Product falls for two consecutive business quarters. But before a recession is officially declared, its effects are felt by the first-time home buyer because housing prices start to fall.

As the economy slows, wages tend to go down, layoffs go up, people spend less and that includes buying fewer homes. With fewer buyers, home prices fall.

This is an advantage for the first-time home buyer because there will be more homes available for sale and what is available will be priced lower.

Interest Rates Fall

Interest rates typically fall in a recession and this benefits the first-time home buyer as well. Money is subject to the same forces of supply and demand as durable goods. The supply of money is limited, and in a strong economy more people are competing to borrow to buy homes, cars and other goods. With demand up, the "price" of money, that is the interest rate on loans, goes up, too.

As the economy cools and in a recession begins to go backwards, interest rates come down.

This is a boon for the first-time home buyer who now find the less-expensive home just bought less expensive on a monthly basis as loan payments are lower. Even some first-time home buyers who bought before the recession can benefit as the lower rates can create a refinance opportunity.

Harder to Get a Loan

But there is a price for the first-time home buyer who is looking for a home in a recession. As an economy turns down, loan default rates go up and lenders grow more reluctant to lend. In a competitive, robust economy, lenders assume rising home values offset part of the risk of lending. If a borrower is unable to pay a loan, the house can be sold for the loan amount. That option goes away in a down economy as home values fall, often below the amount of the loan on the home.

For the first-time home buyer, even though housing costs and interest rates are lower, lenders will look much more closely at your credit score, credit history and debt-to-income ratio. A loan you might have qualified for in a strong economy, you might not in a weaker one.

Values Builds More Slowly

For most, owning a home is a long-term investment where the equity built over time represents a substantial portion of their assets. In a recession, growth in home value will be slow. Depending on where in the recession cycle the first-time home buyer buys, the home could lose value for a time.

If You Own a Home

For the first-time home buyer who bought a first home in a strong economy and now own in a recession, there could be a decrease in the value of the home. It is possible the home is worth less now than the outstanding balance on the loan and that will make refinancing difficult.