Lauren Wellbank is a freelance writer with more than a decade of experience in the mortgage industry. Her writing has also appeared on HuffPost, Washington Post, Martha Stewart Living, and more. When she’s not writing she can be found spending time with her growing family in the Lehigh Valley area of Pennsylvania.
When you hear the phrase “looming recession,” your initial reaction may be to freeze your spending — especially if you’re still haunted by the last economic downturn in which a housing boom and bust led to a subprime mortgage meltdown.
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Economists are pretty split on the probability that the U.S. will head into a recession within the next 12 months. But, as The New York Times points out, the Federal Reserve has been aggressively raising rates to tame inflation, which has given way to a drop in home construction and sales and will likely cause consumers to reign in spending and companies to slow hiring and announce layoffs.
Much is at play, and much like you can’t predict the final score of a football game in the first quarter, it’s hard to tell exactly how a potential recession could affect the real estate market.
“A lot of people may assume that when the Fed’s rates go up, mortgage rates go up, but if you look at the last hike, mortgage rates actually went down,” explains Glenn Brunker, president of Ally Home. “There’s no direct correlation so I would not get overly focused on rates and instead look at larger market trends.”
With all the uncertainty, now is an opportune time to get an understanding of your personal financial identity (you can take a quiz here) and discover how comfortable you are with risks, says Keisha Blair, the founder of the Institute on Holistic Wealth.
If you have adjusted your down payment strategy in these tough economic times and are considering buying a home, real estate experts say a recession shouldn’t necessarily sideline you — in fact, there could be some upsides in this type of housing market.
Here are four more things real estate experts say to consider when you’re buying with a recession in the financial forecast.
Between rising interest rates and continued price growth in many housing markets, now may not feel like the opportune time to buy a house, says Kate Wood, home and mortgage expert at Nerdwallet. But if you have a steady income, and you’re in a position to purchase, you can create a hedge against inflation by stabilizing one of your largest costs.
“If the rate of inflation continues increasing — and rents keep going up along with it — with a fixed-rate mortgage, you’ll be insulated by having a consistent principal and interest payment,” Wood points out.
There are some signs that the red hot housing market is beginning to cool, with home price growth slowing. But current interest rates on 30-year fixed mortgages have climbed to 6.4 percent, more than double what they were when we were in the thick of the pandemic.
The expression “date the rate and marry the house” sounds like it could be HGTV’s next real estate show. But this real estate motto actually means that you can capitalize on lower list prices and then refinance your mortgage down the line when interest rates drop, says Rebecca Hidalgo Rains, the CEO and managing broker at real estate firm Integrity All Stars at Berkshire Hathaway HomeServices in Phoenix.
While it may not be a buyer’s market, the slowing pace at which homes are selling is a telltale sign that the market is beginning to cool. If this keeps up, sellers might be willing to assist with additional closing costs or helping buyers buy down their interest rates, says Deb Gontko Klein, branch manager of residential mortgage company Reliability in Lending – PRMI in Chandler, Arizona. “We’re also seeing new home builders cut prices and offer incentives that are typically unheard of in a hot market,” she says.
While home prices may be lower during a recession, it may be more difficult to obtain financing, explains Cliff Auerswald, president of All Reverse Mortgage.
“Lenders are typically more cautious about approving loans during an economic downturn, so you may need to have a higher credit score and down payment to qualify for a mortgage,” he says. “If you’re thinking about buying a house during a recession, it’s important to talk to a lender beforehand to see what type of loan you might qualify for.”
Also, it’s more important than ever to have an emergency fund in place because during economic downturns as many companies begin layoffs or hiring freezes, he points out.
At times it feels like you need a detailed map to make your way through this wacky housing market. Luckily, we have just that — in the form of Danetha Doe, chief economist at real estate site Clever and creator of Money & Mimosas, a resource for building wealth while staying socially and environmentally responsible. Doe shared her best tips and advice for buying or selling a home today. Here’s what she wants you to know.
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What once was a seller’s market, stuffed full of intense competition for housing, is actually finally starting to even out.
“The homebuying market is shifting from being a seller’s market to being a more balanced market between sellers and buyers,” Doe says. “The increase in interest rates has caused some buyers to slow down or opt out of their purchases, leading to homes staying on the market longer and sellers cutting their listing prices.”
That means you might be able to find a house in your price range (!). If the interest rate is high, consider still purchasing but refinancing when it goes down.
Speaking of interest rates, you’re not about to get much relief. Doe thinks there’s another increase on the horizon.
“I anticipate we’ll see another increase in mortgage rates before the end of the year because inflation is still high,” she says. “The Federal Reserve has made it clear that reducing inflation is a top priority and therefore, will likely increase interest rates again in order to reduce inflation.”
At least it’s good for people with high yield savings accounts.
Before you buy or sell your home, be sure you’re looking into all the programs available to you, Doe says. That means both federal and local programs, which may be able to cut down the cost of your home or provide tax credits.
“For example, as a buyer, check out down payment assistance programs that offer loans at low or zero interest to help you cover the down payment costs,” Doe says. “Sellers, pay attention to the Inflation Reduction Act and see if there are tax credits or rebates you can take advantage of before you sell your home.”
And finally, in what Doe says is probably her most important piece of advice, make sure you’re doing what’s right for you at this particular time — whether that’s selling a home, buying a home, or putting a home sale or purchase on hold for now.
“[Don’t] get caught up in the frenzy,” she says. “You should buy, or sell, a home if it makes sense for you. If you make financial decisions based on the market, you will stress yourself out. Instead, make your decisions based on your personal economy and financial goals.”
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Don’t worry: The housing market isn’t collapsing. Rather, it’s simply returning to pre-pandemic levels — in other words, things are basically getting back to normal, says Carolyn Gagnon, a New York City-based real estate agent.
“The housing market is not anywhere near a crash and is expected to increase in the coming years, especially when this current feeling of uncertainty — due to increased gas prices, high inflation, rising interest rates, and the Ukrainian war — subsides after this ‘wait and see’ moment,” she says.
Still, whether you’re buying or selling (or both!), it can be helpful to know which metrics to keep an eye on as you prepare for a potential transaction. These are a few to watch — and what they’re telling us right now — according to real estate experts.
During the height of the pandemic, homes were getting tons and tons of offers, including many that were well above the asking price and some that were all cash. There were simply too many buyers and not enough homes to go around.
Now, however, the number of offers is trending downward. In July 2021, homes were getting an average of 4.5 offers. Now, in July 2022, they’re getting 2.8 offers, according to the latest data from the National Association of Realtors.
“Sellers should expect to have fewer showings at their properties and fewer bids from their showings,” says Ian Katz, a real estate broker in New York City.
Ask any buyer about their experience trying to get into a house during the last two years and they’ll likely tell you how fast they had to make their decision to put in an offer. Homes were going on and off the market so fast that buyers often didn’t even get a chance to go see them — they just had to wait to pounce on the next listing.
Though buyers are still moving quickly, there’s evidence that the pace is slowing down a bit. In July 2021, 89 percent of properties sold in less than one month. Today, that figure is 82 percent, per NAR.
“Inventory is rising, with properties taking longer to sell,” says real estate agent Kimberly Jay. “This is really a return to a normal market, but it feels worse as sellers became accustomed to selling in a week above their asking price.”
A home’s list price has always been just a suggestion, with buyers deciding for themselves whether to lowball the sellers or offer more money to improve their chances of winning the house. But during the pandemic, that description really rang true: In July 2021, 50 percent of homes sold above the list price.
In July 2022, however, just 39 percent of homes went over asking, according to NAR’s data, suggesting that there’s overall less competition for houses right now. For sellers, this means thinking very, very carefully about the price they decide to list their home at and “treading carefully when considering comps from three to six months ago,” says Katz.
When all goes exactly according to plan, a house that goes under contract will eventually get sold — and officially change hands from the seller to the buyer — within about a month or two.
But when something unexpected happens, like a buyer’s financing falls through or a big problem comes up during the inspection or the appraisal, deals can fall through. These canceled or terminated contracts can be a signal that the market is cooling off a bit.
According to Redfin, 14.9 percent of home-purchase agreements in June 2022 ultimately got canceled, which is up from 11.2 percent in June 2021.
Interest rates greatly affect the number of people who can afford to buy a house at any given time. Low rates make it more affordable to buy a house, so more people are out househunting. If you’re a buyer, this means you’ll face more competition from other buyers. And if you’re a seller, this means you could benefit from bidding wars.
But on the flip side, higher rates make it more expensive to buy a house, leading to a lower number of buyers searching for homes.
Interest rates have been going up since March to help slow inflation — and more hikes could be coming through the end of this year. As such there’s a “shrinking buyer pool,” says Jessica Lautz, NAR’s vice president of demographics and behavioral insights.
“For homebuyers who have lost out on homes in the last two years due to steep competition, but can afford a higher mortgage payment, this could be the opportunity to revisit the buying market,” she says.
Cash is king in the homebuying market. The thing is, there are a whole lot of kings in the current real estate monarchy — in fact, 30 percent of home purchases last year were paid with all cash, up from 25.3 percent in 2020, according to Redfin.
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Even with sizable down payments, first-time buyers have a hard time competing with all-cash buyers, who are favored by sellers because they can make it to the closing table fast and aren’t tethered to financing or appraisal contingencies that sometimes cause deals to fall through. So when a seller is weighing identical offers, they’re likely to bite at the one that has more cash and fewer contingencies.
So, what’s a buyer to do without a throne of cash or significant equity to leverage? A slew of new players are emerging in the homebuying market, with start-up companies like Orchard, FlyHomes, HomeLight, Ribbon, Own Up, and Knock helping first-time and repeat buyers compete with the cash buyers saturating the market.
Each company has different arrangements and strategies for how they help cash-strapped buyers win bidding wars, but the common idea is to make it easier by fronting buyers cash and helping clear contingencies.
You see, over the past year, the housing market has been one of the toughest in decades for potential homebuyers — inventory is low, prices have skyrocketed, interest rates are rising and homes are being sold at a record pace, says cofounder of Own Up Mike Tassone.
“In addition, there has been a growing presence of iBuyers and investors who are gobbling up properties with all-cash offers,” Tassone says. “This has created intense competition in the housing market, causing even the most qualified buyers to lose out on their chances of purchasing a home.”
Sometimes, the best way to compete with an all-cash offer is to make one yourself, Tassonne says. Own Up launched a “Power Buyer Program” for consumers to make a “cash-backed offer,” meaning if their financing falls through, Own Up will purchase the home in cash on their behalf.
Another company, Knock, which partners with agents to provide home loans that allows all buyers to make cash-like offers, continues to see demand for its alternative financing products grow as real estate professionals increasingly recommend their clients go in with their strongest offer from the onset.
Knock’s Home Swap program, for instance, allows customers to buy before they sell their home and thus pull the equity. Knock GO, meanwhile, is designed for first-time buyers, giving them full approval before making an offer, allowing them to remove the financing contingency and guarantee a quick close.
“By removing the financing contingency and having appraisal protection, Knock GO levels the playing field for a first-time home buyer competing against a cash buyer or someone who is putting down a larger down payment,” says Knock cofounder and CEO Sean Black.
These programs may be helpful for some, however, borrowers should always understand the full scope of benefits, challenges, and total costs associated with these offerings, says Stephanie Younger, a Compass real estate agent with The Stephanie Younger Group in Los Angeles.
“It is crucial to sit down with an experienced advisor to discuss goals and specific circumstances to help ensure these types of programs fit your specific needs,” she says.
Gary Grewal, a certified financial planner who runs the personal finance site FinancialFives.com, says another way to make your offer stand out as a first-time buyer is to offer a leaseback to sellers who may need some flexibility as they search for their own home.
Grewal adds that some homeowners associations are starting to restrict sales of homes to owner-occupants only, which could be an interesting trend that swings power back to more traditional buyers.