The Looming Recession
Economists are pointing to a looming recession. This summer we set a record for the longest period of economic growth in US history and many think this growth will come to an end in the next 12-18 months, leading us into a recession. Though we’ve heard this warning many times before, the economy is cyclical and a recession will likely happen at some point in the future.
For the sake of discussion, let’s say the latest predictions are correct and a recession is hitting in 12-18 months. What does that mean for the housing market? Is this a bad time to buy a house? You may have personal memories of loved ones, or even yourself, losing a home during the last recession. This could sensibly cause some apprehension about buying a home just before another one hits. Luckily, most experts agree that the next recession should look nothing like the last.
2008 Housing Crisis
Our last recession was accompanied by a historic housing crisis, but the recession didn’t necessarily cause it. What it did cause was a decline in home values. Falling home values are not a problem for borrowers who can ride out a recession until values bounce back, but for the 12 million borrowers who couldn’t afford their mortgages in 2008, it was a big problem.
In 2006, the banks had gone crazy giving out subprime mortgages, which are high-interest loans for high-risk borrowers. Many of these borrowers could barely pay their loans, setting them up for failure. The banks weren’t worried about creditworthiness because they were reselling the subprime mortgages on the secondary market, passing the problem on to someone else. Before long, unemployment rates rose, the secondary market was flooded with foreclosures, and the recession reached epic proportions.
Will There Be Another Housing Crisis?
Our crystal ball is out of order, but the odds are against another housing crisis. New legislation regulates subprime mortgages and other risks that led to the last crisis. For instance, if you apply for a home loan today, you’ll find a stringent underwriting process that was absent in 2006. This process makes certain of your creditworthiness and ability to repay.
Risks Of Buying Before A Recession
Is it safe to buy a home just before a recession? As long as you can make your mortgage payment the risk is the same as always. Once you’ve been approved for a prime mortgage, you’ve demonstrated creditworthiness and adequate income. This means you can afford the mortgage and you’re unlikely to default.
Moderate inflation should not be enough to prevent you from making your mortgage payment, but unemployment could. If you are in a recession-vulnerable job sector, you may need to take extra measures (plenty of savings, for instance) to prevent falling into default on your mortgage. Recession-vulnerable jobs can include entertainment, travel, and suppliers of luxuries that people on tight budgets simply don’t buy. How did your field do in the last recession? Were there significant layoffs or business closures? If so, you could be at higher risk of default than someone who works in a recession-resistant industry like healthcare or law enforcement.
If your job is recession-resistant and you have good credit, then you should definitely consider buying a home. Today’s low-interest rates could save you thousands over the term of a mortgage. As long as you’re certain you can pay your bills, especially your mortgage, then why not ride out the next economic storm in the comfort of your new home?
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