How a Soft Housing Market Impacts Your Home Buying Journey

To be clear, WE ARE NOT currently in a recession nor do we think one is highly probable immediately. However, economists, talking heads on the news, and nearly every media outlet known to man have recently discussed a softening of the housing market, even a potential downturn in our blooming economy. Rightfully so, as many economic triggers have sent warning signs that a slowdown is on the short-term horizon. Movements with interest rates, threats of trade wars, and overall uncertainty in the markets overall lay the groundwork for such conversations and foreshadowing.

For those who pay close attention to the media powers that be, it would be easy to agree that the doom and gloom of economic turmoil due to a possible recession was happening at nearly any moment. The United States has experienced its longest run of growth and stability over the last decade, and as market cycles go, that has to come down at some point.

According to a recent report from the National Association for Business Economics that surveyed more than 200 members, 38 percent believe a recession is coming sometime in 2020, while another 25 percent believe 2021 is the year. It is clear that many economists are starting to feel as though the current state of the nation is unsustainable from a growth perspective, despite steady increases of leading indicators such as employment and wages.

What a Potential Recession Means for the Current Housing Market

Although a recession is possible to occur within the next 10 years, no one can predict within 100 percent accuracy when and to what extent it will occur. What we do know, though, is that unlike the Great Recession, spurred by a housing market bubble that had nothing to do but burst, the next economic slowdown will not have the same driving forces.

Many consumers remember 2008 and shudder, thinking not-so-fondly of the rapidly decreasing home values and crashing stock markets that rattled many to the core. Several factors were in play during this time and in the years ahead of the downturn, not the least of which were massive investments in subprime mortgages and unsustainable business practices by institutional firms investing in mortgage-backed securities

The challenges of these complex issues, combined with increasing consumer debt obligations and increases to adjustable rate mortgages across the board, created an environment where markets overall had nowhere to turn but down. This resulted in a 30 percent decline in both housing prices and stock market levels in a short period.

In today’s market, we are not nearly in the same place as the years leading up to 2008.

The lending market is nowhere near as lax as it used to be. Increased credit requirements, disclosure documents, and an overall tightening of the mortgage lending process have taken place since 2008 thanks to refreshed regulation. Although subprime mortgages still exist, these home loans make up far less of the market than in years past.

Additionally, the housing market from a pricing perspective is just now getting back to pre-recession levels. Part of the problem in some high-growth areas of the country was that home prices had exploded to unrealistic and unsustainable levels. They had to come down from those inflated values. While some local markets are still considered high-priced for the average homebuyer, home prices have stabilized in recent years. Real estate experts do not predict a decline in home values in the near future; in fact, some believe home prices will continue to rise until the next recession takes place.

Homebuyer Considerations

So, what does this all mean if you’re on the fence about buying a home? First and foremost, making homeownership a reality should not be predicated on the assumption that a recession will start sometime in the next one to two years. The Great Recession of 2008 was named that for a reason. The housing market and mortgage environment looked tremendously different compared to today’s outlook. Fortunately, no expert believes that the same type of turmoil will occur in housing and lending during the next economic downturn. Even though the housing market is gradually slowing down, the decline is not in the same ballpark as the last recession nor is it anticipated to get to that point.

Other factors will be driving a slowdown – shifts in trade policies and stagnation in wages and employment. These issues are likely to lead to fewer jobs, layoffs, and impacts on the stock markets both domestically and abroad. There is not expected to be a drastic decrease in home prices, although the supply of available homes may tighten along the way. In a recession with these attributes, having a home that is affordable is essential.

Instead of focusing on what could take place to the overall economy during the next downturn, as a prospective homebuyer, you should be focused on affordability first. This means taking a close look at your ability to purchase a home and sustain that decision for the long-term. Coming to the table with a down payment that fits your financial situation as well as working on creating or maintaining a healthy credit score lays the groundwork for an affordable home. Mortgage interest rates remain low for now, which adds to the affordability factor for potential buyers.

Focusing your attention on these aspects of homeownership is crucial to making the right decision – for you – regardless of what the media portrays as the next economic hurdle. Owning a home should always be viewed as a long-term investment, and so small, cyclical decreases in home values during a recession should make little difference. Directing your attention to these homeownership truths will make for a better, smarter home buying decision than trying to time a purchase based on a future recession.

If you are considering purchasing a home or still have questions about how a recession impacts the process please contact us today for personalized advice and guidance.

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