You might be unsure about whether or not to buy a house with so much economic uncertainty on the horizon. Is buying a home before a recession a good idea or a bad idea? Pay attention and you’ll notice that everyone seems to offer differing opinions.

Here is everything you need to know to make an educated decision.

What is a housing recession?

A housing recession is when home sales, home prices, and new construction all take a downward turn.

Unfortunately, a housing recession can hurt all aspects of the U.S. economy because so many aspects of business and day-to-day life are interconnected. According to the National Association of Home Builders (NAHB) and the Bureau of Economic Analysis (BEA), the housing sector contributes about 15-18% of the national GDP.

When a housing recession occurs, inflation soon follows. Consumers pay more for the same products without receiving an increase in their incomes. In other words, the U.S. dollar becomes less powerful.

Is a housing recession coming in 2023?

Historically speaking, all of the conditions that have led to recession are present in today’s economy. While Fannie Mae has revised its expectations from 1.2% growth to 2% annual economic growth for 2023, the difference between GDP and GDI is 0.1%, which suggests a downward decline.

Meanwhile, the Consumer Price Index, which measures the change urban centers pay for necessary goods and services, notes that prices have increased 5.3% over the past year. This clearly shows that the economy cannot keep up with current inflation.

Moody’s Analytics, another economic study firm, says that there are better than 50% odds that the economy will be in a recession within the next two years based on historical economic trends. The Federal Reserve is trying to respond to the problem, but former Treasury Secretary Lawrence Summers doesn’t think they will achieve their goals before the recession starts.

Tips for buying a house before a recession

Most experts agree that a recession is either here or on the way, but that doesn’t mean it’s a bad time to buy a house. Buying a home at the right time and the right price can give your family some stability during economic upheaval.

There is a lot of advice out there about buying a house during a recession, but what about buying before a housing market recession? Here are some things to keep in mind when deciding to buy a house before a recession.

#1: Understand your real estate timeline

Real estate tends to go through predictable cycles. It takes about 3 to 5 years for a real estate market to flip its inventory and find new price stability after a housing recession. Expect to wait up to 5 years after the start of a recession before property values will be on an upward incline.

How long you plan to stay in the home should play a large role in deciding if buying a home in a recession is right for you. The average homeowner stays in their home for about 13 years. If you buy a home now, you should see some improvement in home value before you are ready to move.

#2: Consider your industry stability

A reliable income is vital when you are about to buy a home. Job stability is always a concern in a troubling economy. Is your industry stable? Will your career continue to be relevant and in demand?

Luckily, the Bureau of Labor Statistics offers a resource that gives an accurate career outlook for every industry. The Occupational Outlook Handbook (OOH), originally published in print from 1949 to 2012, provides detailed outlooks of various industries and occupations in the US.

Look up your occupation and industry for insights. If your industry is starting to decline or your position may not continue to be in demand, you can use the OOH to find alternative careers for which your experience is well-suited.

#3: Buy within your budget

According to the experts at Chase Bank, you should spend 28% or less of your monthly income on your housing payment. This includes taxes, homeowners’ insurance, principal, and interest. We may not be 100% in a housing recession yet, but we will likely be seeing one in the near future. As inflation continues to rise, your other expenses will increase as well. Budgeting the full 28% of your income for a mortgage payment might not be realistic.

Instead, review your expenses and income for the previous 6 to 12 months. Tracking your spending lets you know exactly where your money is going. Look for places where you could cut back if needed to make sure that your budget is realistic. Once you have added up all other monthly expenses you’ll have a better idea of what you can comfortably afford for a mortgage payment.

#4: Have an emergency fund ready

If you lose your job, are laid off, or inflation rates continue to skyrocket, having an emergency fund can get you through a housing recession.

When you have a mortgage, your emergency fund should be more than one monthly payment. Ideally you should have an emergency fund that would pay your mortgage and utilities for at least a few months in case of a lay-off or unemployment.

One way to build up an emergency fund is to calculate how much you can reasonably save each month and work it into your budget. Include an amount to go to savings in your monthly expense calculations. You will be able to build an emergency fund rather quickly, and if you have a decrease in income it will give you more flexibility in your budget.

Another thing you will want to consider is putting your money in a high interest savings account, or purchasing some high interest CDs if you have room in your budget. Neither may not be able to completely keep up with inflation, but it’s better than sitting in an account earning 0% interest. For savings accounts, find a bank or credit union that has no minimum balance requirements and that doesn’t charge anything in monthly fees. They exist, you just have to find them. For CDs, determine a comfortable time frame you can be apart from your money. If you withdraw early, you may lose any interest your account has earned and you may have to pay fees.

#5: Lock in your mortgage rate

Once you are under contract for your new home, lock in your mortgage rate with your lender. Locking your mortgage rate now prevents it from rising as the Federal Reserve attempts to resolve the housing market by increasing rates further.

Another option is to negotiate a free float down, which lets you lock in a lower rate if interest rates decrease. Make sure you keep an eye on interest rates so that you can contact your lender as soon as it would benefit you.

Conclusion

Buying a house can be an inflation hedge— meaning it can protect you against the rising costs of goods and services that often occur during inflation and a recession. Do so early enough, before interest rates rise significantly, and you’ll be patting yourself on the back as rent prices also escalate. Remember, if rates drop, you can always refinance your mortgage.

If you have more questions about buying your first home, check out our Homebuyer’s Workbook. We cover a lot of ground in it, and even include worksheets throughout to help you understand what you can afford, how to compare houses, and how to choose the best lender, etc.

FAQ

Is it better to buy a house before or after a recession?

It is better to buy a house before rather than during a recession. Buying a home during a recession is likely to get you a great price, but you won’t be in the home for long before housing prices rebound. If you are interested in staying in your home longer than 5 years, it’s better to buy a house before the recession starts. You will still get a lower than usual price, but within 5 years after the recession when prices increase you’ll likely be ready to move and cash out on your investment.

Will housing prices go down during a recession?

Yes, housing prices historically go down during a recession. The coinciding hikes in interest, unemployment, and inflation rates motivate homeowners to sell quickly. This drives down prices, but if you don’t lock in your mortgage rate your payment could still go up when the recession ends.

Will there be a housing crash in 2023?

It is impossible to predict exactly when the housing market might crash. When looking at the history of the housing market in previous recessions, it is clear that a housing crash may be imminent. There are still a few factors that might head off a recession, or decrease the effects of the softening housing market. Keep a close eye on coming economic reports to ensure you’re making the right decision before buying a house in a recession.