Between the coronavirus pandemic and a plummeting stock market, many may wonder: Are we headed for a recession? Anyone hoping to buy a home anytime soon would probably like to know the answer before committing to a major, long-term purchase.
While economists say that the odds of a recession are uncertain, evidence does suggest that, at the very least, economic growth is substantially slowing, says George Ratiu, senior economist for realtor.com®.
The International Monetary Fund downgraded its global economic growth predictions, oil market battles and COVID-19 fears are roiling the stock market, and trade wars with China, European countries, and others are still possible.
And if you believe in self-fulfilling prophecies, consider this: According to a realtor.com survey of consumer sentiment conducted in late 2019—before the coronavirus news broke—more than 30% of Americans had already expected to see a recession in 2020. Plus, 56% said they would postpone buying a home until the economy improves.
“With expectations of slower growth, I think consumers are internalizing that, and possibly taking a longer look at their purchasing decisions,” Ratiu says.
Yet that same survey also found that 44% plan to continue their house hunt, which experts say may make sense for many.
“Recession or not, it’s impossible to time the market, whether for buying stock or buying real estate,” points out Roger Ma, a New York–based financial planner and owner of lifelaidout.
And considering that mortgage rates recently plummeted to their lowest level in nearly 50 years, the time may still be right for those who have their finances in order.
“Instead of trying to time the market, make sure that the timing is right for your own personal situation,” Ma says.
Here are six questions to ask yourself to determine if buying a home while a possible recession looms is the right decision for you.
How much do I have saved?
A high savings account balance usually puts you in a good position to buy the home you want. But, it’s even more important during a recession, when the job market may be unstable, Ma says.
So how much should you have saved? Ma recommends having 20% of a home’s price in the bank for a down payment, about 4% to 6% extra for closing costs, and enough to cover three to six months of living expenses in case of an emergency.
What kind of financing will I qualify for?
Getting pre-approved for a mortgage is an essential first step in buying a home. The better your credit score, the more likely you’ll lock in a mortgage with a low interest rate and good terms, Ma says.
Lenders will vary in what they consider an acceptable credit score, but generally a score of 750 to 850 is considered excellent, 700 to 749 good, and 650 to 699 fair.
Also make sure that your monthly mortgage payment is manageable, generally below 28% of your gross income, Ma said.
If you’re in good financial standing, current mortgage trends offer an advantage to buy a house now, Ratiu says, with mortgage interest rates remaining at historic lows just above 3%. So it may pay to strike now before they start going up!
How will home prices be affected by a recession?
During a recession, home prices may drop—or at least not go up too much. This could mean that if a recession happens soon, any property purchase you make now might dip in value. Likewise, if you wait and purchase in the midst of a recession, you could stand to snag a deal.
So should you wait? Perhaps, although one argument against waiting is that housing inventory remains low, Ratiu says.
As such, “even if there is an economic slowdown, we will see much more modest price reductions,” says Fiona Petrie, executive vice president and managing director of Re/Max Integra. “At the end of the day, it is always a good time to buy, if you can afford to buy a home.”
The only bad time to buy a home, recession or not, Petrie says, is when you buy beyond your financial means. Get a handle on your financial situation, and you’ll know how much home you can afford.
What’s my time horizon?
Time horizon is another important factor to consider. This refers to how long you plan to stay in the home to ensure that the purchase is a solid, long-term investment.
Homeowners these days tend to stay in their homes longer than in the past, around 13 years, according to the National Association of Home Builders. But, Ma says, staying in a home at least five to seven years is a good time horizon.
The longer you plan to live in the home, the better if a recession hits, Ratiu says. Years later, the economic situation may be improved.
“Over a longer time horizon, housing tends do fairly well,” he explains. “If the buyers are ready, in a good financial and economic position, it’s as good a time to buy as any.”
How healthy is my local economy?
Along with your own financial health, consider the economic health of the city or town where you plan to buy, Ratiu says. During a recession, not all locations experience the economic slowdown at the same rate or in the same way.
Look back at the severe 2008–09 recession, he says. Larger cities felt an immediate impact, while others didn’t see the effects until a couple of years later.
“For buyers it’s important to consider what their local market conditions look like,” Ratiu says. “Is the economy well-diversified? Is employment strong? Is the outlook for jobs positive, and why? Because those definitely are strong drivers of housing demand and health.”
Real estate agents can run a local market analysis for you, Petrie says. Evaluate sales within 30 to 60 days during a recession to see if prices are similar or not. This can help you gauge what will happen with local housing if another recession hits.
Do I really even want to buy a home?
Even if you can afford the home and plan to stay there a while, make sure you also have sufficient cash to fund all the other things you want to do, like going on vacation, buying a car, or saving for a child’s education.
Ma urges potential home buyers to assess whether they truly want to buy a home—and how it may affect their overall lifestyle.
“Most of us only have so much cash and ongoing cash flow from our salary, but there’s a lot of different things we want to do,” he says. “Where does buying a home fit in that goal priority set? I think it makes sense to take a step back and say, ‘How important is this to me versus these other goals that I have set for myself?’”
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