Is it Safe to Buy a Home if a Recession Is Coming?

By: , Contributor

Published on: Dec 15, 2019

Recessions are scary, and taking on an extra expense when you fear one is coming can be a daunting prospect.

Recessions are a natural part of the economic cycle, and since the economy has had a pretty good run over the past few years, many financial experts warn that a recession is fairly imminent.

Now, when we think about recessions, we might imagine extended periods of extreme economic turmoil. That's because the Great Recession of 2008 left a bitter, and terrified, taste in the mouths of those who lived through it. During that time, many people lost their homes to foreclosure when their wages declined and they couldn't keep up with their mortgage payments. And as a prospective homeowner, that's probably among your greatest fears.

If you’re looking to buy a home in the next few months, you may be wondering: Are you okay to move forward if a recession is likely?

Surviving a recession as a homeowner

There are two concerns associated with buying a home when a recession is looming. The first is that you'll lose your job or take a hit on your income, and therefore struggle to keep up with your housing costs. The second is that your home will decline in value, thereby creating a scenario where you're underwater on your mortgage.

But if you play your cards right, you can emerge from both situations unscathed.

With regard to a loss of wages, the truth is that you never know how you'll fare financially in a recession. It could be the case that your investment portfolio takes a hit, but your paycheck holds steady, and since you should, ideally, be paying your mortgage from the latter, you may not have a hard time covering your housing costs.

Furthermore, you can buy yourself some protection in the face of a recession by having a robust emergency fund. That way, you'll have money to tap into in the event that you do wind up jobless for a period of time.

As far as the second concern -- declining home values -- goes, the reality is that having your home lose value is only really an issue if you need to sell it or borrow against it. But if you intend to stay in your home for a long time and have a healthy emergency fund to help with mortgage payments and serve as a cash source in place of a home equity loan or line of credit, then there's not all that much to worry about. As is the case with buying stocks or other investments, you only take an actual loss if you sell at a loss.

In other words, if you buy a home for $200,000 and a recession hits, driving your home's value down to $170,000, you don't lose money on that property unless you actually sell it for $170,000. If you're planning to stay in that home long enough to see its value increase, or you have enough savings to prevent a scenario where you have to sell, then you're good.

Another thing to consider is that many recessions are relatively short-lived, and home values don't always drop during them. A big part of the reason so many people lost their homes roughly 10 years ago is that The Great Recession was extremely lengthy, and at the time, borrowing standards were much lower on the mortgage front. As such, countless homeowners were given mortgages they never should've been approved for in the first place.

Nowadays, borrowing practices are more stringent, so chances are, if you take out a mortgage, it's a loan you're capable of paying back based on your current financial circumstances. And if you go into homeownership with a substantial emergency fund, you'll be positioned to ride out any periods of compromised wages.

When will our next recession actually hit?

One final thing to remember is that while many financial folks are convinced a recession is right around the corner, many have been saying that for well over a year. The reality is that we can't predict exactly when a recession will hit, and if you keep waiting for the next one to pass before buying a home, you might never end up buying. Therefore, if you can afford to purchase and maintain a home and you have healthy savings, it could be well worth it to take the plunge and just go for it.

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