“It’s not a matter of if a recession is going to happen, it’s a matter of when it’s going to happen.”
With inflation at a record high, mortgage rates and housing prices continuing to rise, and consumers everywhere are feeling the proverbial pinch, now is the time to prepare for an imminent recession.
Tim Pascarella, Ross Mortgage President, shares the key differences between the state of the market in fall 2022 and what we saw with the 2008 recession, key information every homeowner should know, and what everyone can do to prepare for a recession on the horizon.
A recession is a recession
Despite almost 15 years having passed from the 2008 recession, the 2022-2023 recession is likely going to feel like any other on the surface level. The timeframe will typically take less than a year; jobs will be lost; interest rates will be high. The key difference? Home equity.
2008 vs. 2022 – A shift in equity
In 2008, Americans had the least amount of equity in their home in the history of time. As we look to the 2022-2023 recession, we are going to go into it with the most amount of equity we have ever had in our homes. The key difference between this recession and 2008 is that homeowners are going to have an out – they will be able to sell their homes.
This is great news, but many will face the key decision of cashing out their house as they head into the recession or attempting to wait it out.
A domino effect – 360 flip of the housing market
A fact many do not take into consideration – until it’s too late – is the only way to tap into a home’s equity is to sell the home. A homeowner could have $400,000 in equity in their home, but if they don’t have a job, they are not going to get a mortgage or home equity line of credit.
This leads into a larger problem – a potential flip in the housing market to what we’re experiencing today. If millions of people suddenly need to tap into their equity, and the only way to tap into that equity is to sell their homes, we will see a market in which there are more homes available than buyers. This flip typically happens in a recession, which leads to values decreasing.
Decreasing values and rate of appreciation – What does it mean?
In 2008, values plummeted significantly. While we likely won’t reach this huge decrease, the area where we will see the greatest effect is the rate of appreciation of homes. We will likely see 1-3% increases per year instead of the double digit increases we have been seeing over the past six or seven years.
The rate of appreciation in today’s homes has been going up simply because of the massive demand. The houses weren’t built better or were nicer – the values we have seen have been directly related to demand.
The bottom line
The 2022-2023 recession is going to lead to a fear of oversupply, which will drive down prices. Homeowners will also experience the fear of realizing the only way to get to their equity is to sell their house. Unfortunately, the individuals who may suddenly find themselves unemployed will be unable to secure a mortgage or line of credit.
How can we prepare for the recession ahead?
- Don’t bury your head in the sand – Make sure you are aware of what’s going on with your employment and what your outlook looks like for the next 18 months.
- Consider a higher interest rate – Hanging on to your low interest rate may seem like a good decision now. However, increasing your interest rate may give you the chance to not have to sell your home and would get you through a difficult situation.
- Be ready to weigh your options – If you face the decision of selling your home, you need to evaluate if you’re going to be in a better position while renting. Renting sometimes may lead to higher monthly bills, so making sure you do your research on the market is extremely important.
- Lower your monthly expenses – The best thing everyone can do to prepare for the recession today is to lower your monthly expenses as much as you can. Looking at expenses outside of your home, such as credit card debt, will help you get a better view of your overall financial picture and help you in the long run.
The reality – A recession isn’t always a bad thing
A recession is not always the worst thing in the world. Inflation got incredibly out of hand in 2022, and people everywhere are being impacted by it. We may need a recession to flatten us back out and reestablish a sense of normalcy in the market.
Preparing today will help you navigate the road ahead, and our team is ready to help you make the tough decisions. Contact Ross Mortgage today and one of our expert advisers will be there to answer all of your questions and ensure you are taken care of and ready for the next recession.