We're currently in the second-longest period of economic growth in American history, with low unemployment, rising home values, and a surge in home-ownership rates. It certainly looks good on paper, but what goes up must come down: Some experts—including more than 20 economists from the National Association for Business Economics and 50 real estate experts and economists in a survey for Zillow—predict the next recession is likely to hit in 2020.
As the country's last major recession hinged on the spiraling housing market, a looming recession might seem particularly daunting if you've just purchased your first home or are preparing to buy in the next few years. So what should you expect for this next potential downturn? I spoke with experts in real estate and home financing to get the full picture.
The good news? The housing market isn't likely to tank the economy like it did in 2007. However, the experts I asked said they'd always recommend being realistic about your budget and taking out the right mortgage to protect yourself from a potential recession. In some instances they even viewed the recession as a good thing, saying that it might even offer new opportunities to buy for those left out of the current market by high prices and interest rates.
It's worth mentioning that there's no true consensus on when a downturn will come, and how bad it might be. "2020 is pointed to a potential recession year because it's just outside of the really-good forecast range for most economists," says Danielle Hale, chief economist with Realtor.com. "It means they don't see a recession for the near-term future—where the forecast is good—but they think there will be another recession one day, and it could be in the future where we don't see the data very well."
However, when it does come, most economists say the housing market won't be the sole cause: "Obviously housing played a big role in the last recession, it's not necessarily obvious it will play a big role in the next recession," says Aaron Terrazas, senior economist with Zillow, who sponsored last month's economic survey. "The economists we surveyed were far more concerned with things like trade, geopolitical crises, and interest rate movements."
Still, there are some factors in the housing market worth paying attention to in terms of planning for a recession. So far in 2018, mortgage rates have seen the most sustained increase to start the year in over 40 years. U.S. home values are rising at the fastest pace in 12 years. And income levels are not keeping up with rising home costs.
As mortgage rates rise, there are more loan programs for first-time buyers to tap into, according to Nathan Pierce, a certified residential mortgage specialist with Advanced Funding in Salt Lake City, Utah. "That in itself can be a problem," he says, noting there's a chance such new programs—as well as existing ones—could lower down payment requirements or credit score minimums. "What caused the housing crash in 2007 and 2008?" he asked. "It was that there were just too many risky loan programs available to everyone." To add to the risk, the Trump administration started rolling back Dodd-Frank measures, put in place after the 2007 mortgage crisis. Banks are again able to lend mortgages to riskier borrowers.
That means it's extremely important that first-time homebuyers apply for mortgages with caution. The standard in the home financing industry is to approve borrowers for the maximum amount they qualify for and get them into home with the bare-minimum down payment—even if they have no savings, says Pierce. His advice: "You don't need to be maxing out." Zillow found that 27% of first-time homebuyers go over budget. Pierce recommends instead that you set a budget and determine what payment you can afford prior to talking to a lender.
It's also worth considering putting more money upfront for a downpayment, says Terrazas. He recommends putting as large of a down payment as possible to build an equity cushion in your first home. It'll protect you, Terrazas notes, in case a downturn comes. For example, if you lose your job and have to sell your house, you have more of a fund to fall back on. "If your home value falls 2 or 3%, it won't be devastating for your finances," he says.
Savings are also crucial to weathering any downturn with a new home. "If you've already bought and don't have between three and six months of living expenses saved up, try and get there as soon as possible," recommends Hale. She notes that a "worst-case scenario" of losing your job during a recession is usually about six months of unemployment, so it's a safe number to bet on for savings.
And though it might seem like a recession means it's more difficult to buy a home, one expert actually suggests that it might help curtain buyers: Jonathan Miller, founder and president of the real estate consulting firm Miller Samuel Inc., says he's paying most attention to limited wage growth in the face of rising home prices. He believes one possible outcome for 2020 is neutralizing the home value growth rate to meet increased affordability needs. Miller says the recession could even manifest as an economic correction: "Rates will fall and demand will cool, which will soften prices," he says.
Miller believes this wouldn't necessarily be a bad thing for homebuyers looking to enter the market. In a recession, the housing market is generally assumed to be softer (less demand to move), so therefore sellers are asking for less money for homes and there aren't as many buyers competing and driving prices up: "It's a potential opportunity to buy more affordably," he says.
Still, most experts recommend that first-time buyers shouldn't decide to buy or sell based on these market predictions (also known as trying to "time the market"). No one can predict the exact changes to the economy; it's more important to get your savings in order and research the mortgage that makes sense within a realistic budget, while taking into account new homeowner costs like maintenance, property taxes, and insurance.
"If the time is right for you now, if you're financially ready and find a home that works for you, I wouldn't wait," says Hale. "There are just no guarantees on what could happen in the future."