How a Recession Could Change the Housing Market, and What It Means for Homebuyers

An illustration of a house on an earthquake fault line is used to illustrate an article about buying a home during a recession. Credit: Getty Images
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Is now the right time to make the biggest financial decision of your life? 

Soaring inflation and an economy trending toward a potential recession have many wondering if buying a house is still a good idea. It could be, experts say, but it can be risky. 

A recession doesn’t unilaterally mean a good opportunity to buy a house. That depends on your individual financial situation. You may be in the right position to buy if you have flexibility in your budget, an adequate emergency fund, and sustained income security. 

“Buying a house in a recession – if you can find a house that you like for a price you can afford – I think is a great idea because you are taking control of your greatest monthly payment,” says Jennifer Beeston, senior vice president at Guaranteed Rate, a national mortgage lender.

Here are some things to keep in mind as you decide whether or not the time is right to become a homeowner.

What Happens to the Housing Market in a Recession? 

A recession typically means rising unemployment and a sustained lull in economic growth.  Some economists predict that a widespread recession is likely or already underway, with inflation, at 8.3% year-over-year in August, a key factor. Unemployment, meanwhile, was 3.7% in August, up from 3.5% in July. 

In a recession, homebuyers may be expecting home prices to drop, but that isn’t always the case. “The degree and speed” of a drop in prices “is influenced by numerous factors – including debt levels of potential homebuyers, current prices versus the historical median, demographics and the age of the homebuying population,” says Kevin Brady, a certified financial planner at New York-based Wealthspire. 

The housing market is experiencing a slowdown, with home sales in June down 20.2% from a year earlier, according to the National Association of Realtors (NAR). “Our belief is that we are probably in a housing recession, but we are not yet in an economic recession,” says Ali Wolf, chief economist at Zonda, a housing data firm. “But a housing recession doesn’t have to mean the imminent demise of the sector. It just means that the market is operating a lot slower than it has been over the past couple of years.” 

In a typical recession, the Federal Reserve will lower its benchmark short-term interest rate to help stimulate the economy, in turn making homeownership an attractive opportunity.  But today, the Fed’s primary focus is cooling down inflation by hiking that rate. It has already done so four times this year, and is expected to keep doing so through at least the end of 2022.  

Though the two are not directly related, mortgage rates are rising alongside the Fed’s interest rate. The average 30-year fixed rate has risen from around 3.3% at the start of 2022 to close to 6% today. “Expect to see a lot of mortgage rate volatility,” she says. “Rates are going to change in relation to what our policymakers and the Federal Reserve are doing to cool inflation.” 

The Housing Market Is Starting to Balance Out

Even though home prices and mortgage rates remain tough to swallow, experts say you can expect things to equalize between buyers and sellers.  

“It’s been an extreme sellers’ market, meaning that you had to make an offer the day a home was listed and let go of your purchasing protections and contingencies,” Wolf says. “What we’re seeing is a return of negotiating power. The buyer can finally have a seat at the table again.”  

During the housing market’s peak, many homebuyers went without a professional home inspection in order to make their offer more competitive. Now, 92% of recent sellers accepted terms friendly to the buyer and 95% of recent buyers requested an inspection, according to a recent survey by Homebuyers can expect more choices. Albeit still sparse in many sectors, the inventory of active listings is finally trending upward.  

Lessened competition and a return of bargaining power are welcome news for prospective homebuyers looking to mitigate high home prices and mortgage rates.  

Make the Right Homebuying Decision for You 

Experts recommend a conservative approach when it comes to the housing market today. Being cautious with how you spend your money right now is essential. 

Focus on your budget

Make sure you can afford a house. “Before you even call a lender, do a budget,” Beeston says. “Look at where your spending is. Look at what you can afford with a monthly payment.” 

Making the right home buying decisions ultimately boils down to your individual needs. Don’t fret too much about what prices will do in the future. “Anyone looking to purchase a home as a primary residence during a recession should not be viewing it as an investment,” Brady says. “This is always true of home purchases, but especially true during recessionary periods where prices can be volatile.”  

Establish your emergency fund

In any economy, having an emergency fund is smart, but it’s especially important in a recession. The odds of losing a job or struggling to find a new one are higher, and you want to make sure, before making any big decisions, that you have the time and money to do so.

Making regular contributions to savings – especially a high-yield savings account that gives you better-than-average returns – will set you up to be able to weather any financial storms and still be able to pay your mortgage if you take on a house. Make sure you have enough to cover at least three to six months of expenses, including that potential new mortgage, and don’t touch it unless it’s really an emergency.

Work with a lender

Your next step is to visit a lender, Beeston says. “Get fully pre-approved and underwritten before you go shopping,” she says. “You need to be working with a lender who will take the time to go through what the closing costs will be, strategies for reducing those costs, and a breakdown of what your monthly payments will look like.”  

Lenders will give you an estimate of what you can afford, but take it with a grain of salt. 

“Talk to a loan officer and see what you qualify for, and then ratchet that back,” Wolf says. “A loan officer will tell you the highest amount you can qualify for, but I would suggest shopping for a lower price point,” to account for additional costs and give yourself some breathing room. 

Keep in mind that on top of your mortgage, you need to account for property taxes, maintenance costs, and unexpected expenses

Always shop around with different lenders. Every lender will offer different rates and options so you can compare and find the best loan for you. 

Pro Tip

Shop around with different lenders to get multiple quotes on a mortgage. Resist going with the first quote you get; each lender may offer you wildly different interest rates.

Determine what’s right for you

You might find yourself in a situation where you need a house. “You’re going to have to look in different locations and be a little bit more flexible on size and other things,” Brady says. “The worst thing you can do is try and stretch for a home in a recession and end up paying too much for it.”  

Don’t push your finances too far, Wolf says. “You want to have a cushion in your savings account. If you’re flush with cash and could do a down payment without emptying your savings, I think that makes sense. If you have any nagging sense that you are stretching your budget,” it’s probably best to press pause.  

Consider the ‘rent versus own’ equation

Under the pressure of rising rents, the housing market, many millennials and members of Generation Z contemplate buying a house. The appeal of a fixed payment and the opportunity to build equity over time is tempting for younger buyers who are experiencing firsthand the impact of inflation on rental rates. 

“One of the key things to look at is the ‘rent versus own’ equation,” Wolf says. “If you are paying a similar amount in your rental compared to what you can get in purchasing a house, it may make sense to seriously consider converting to homeownership. The wealth-building aspect that comes with homeownership is a major pro.”  

Be Patient 

While a recession can bring house prices down, experts don’t recommend rushing out to buy. Make sure you’re in a position to buy, and make a lifestyle decision, not just a financial one. A house is an asset, sure, but it’s first and foremost a home. 

“But to the same point, if you’re in a financial position where you’re not being adversely affected, or if you have the opportunity to buy into something that is less expensive per month – that’s a good thing,” Beeston says.