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NextAdvisor Mortgages Mortgage News How a Recession Could Change the Housing
Market, and What It Means for Homebuyers
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HOW A RECESSION COULD CHANGE THE HOUSING MARKET, AND WHAT IT MEANS FOR
HOMEBUYERS

Katherine Watt
Katherine Watt

Associate Writer

Katherine Watt is a writer for NextAdvisor specializing in personal finance.
Based in New York, Katherine previously…

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September 13, 2022 | 7 Min Read
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Editorial Independence
We want to help you make more informed decisions. Some links on this page —
clearly marked — may take you to a partner website and may result in us earning
a referral commission. For more information, see How We Make Money.

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 Realtor.com. 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.  

Get the latest on the housing market delivered to your inbox every week.
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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.  




TODAY'S RATES

 * Mortgages
 * Refinance

30 Year Fixed
7.210%

--------------------------------------------------------------------------------

15 Year Fixed
6.480%

--------------------------------------------------------------------------------

FHA - 30 Year Fixed
7.360%

--------------------------------------------------------------------------------

VA - 30 Year Fixed
6.510%

--------------------------------------------------------------------------------

Jumbo 30 Year Fixed
7.190%

--------------------------------------------------------------------------------

See All
30 Year Fixed
7.210%

--------------------------------------------------------------------------------

15 Year Fixed
6.480%

--------------------------------------------------------------------------------

30 Year FHA
7.380%

--------------------------------------------------------------------------------

30 Year VA
6.560%

--------------------------------------------------------------------------------

Jumbo 30 Year Fixed
7.210%

--------------------------------------------------------------------------------

See All

Stay in the know with our latest home stories, mortgage rates and refinance
tips.

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