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What Does a Recession Mean For Your Housing, Job, and More?

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If the ongoing talk about whether we’re in a recession has you worried about your job, your home, and affording everyday necessities, you’re not alone. Among 2,000 people in a recent survey, 59% expected a recession by the year’s end, with inflation (88%), housing costs (61%), and rising interest rates (56%) among their top concerns.

President Joe Biden said this month that a “slight recession” is possible, adding, “I don’t anticipate it.” Yet JPMorgan Chase CEO Jamie Dimon expects that the country will enter a recession within six to nine months, and 72% of economists this summer predicted a recession by mid 2023.

As financial experts keep tabs on the economy’s pulse, you might wonder, “What does a recession mean for me?” Let’s take a look at what a recession entails and how this might impact you.

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Are we currently in a recession?

Frankly, that depends on whom you ask. We’re in a recession if you follow the general definition of one as “two or more consecutive quarters of a negative growth rate of gross domestic product” (GDP). The GDP, or the total value of everything the United States produces, fell 0.6% during the second quarter of 2022 after dropping 1.6% during the year’s first quarter, data shows.

However, the nonpartisan National Bureau of Economic Research (NBER) of Cambridge, Massachusetts, says no, noting that a recession lasts more than a few months and is “a significant decline in economic activity that is spread across the economy.”

Robert Dietz, chief economist of the National Association of Home Builders (NAHB), said at an October conference that he’s noticed a recession, citing the two quarters of GDP decline, a slowdown in construction, and other factors.

Meanwhile, other financial experts agree with the NBER, even if they foresee a recession around the corner. Tim Holland, chief investment officer at Orion Advisor Solutions, for instance, said in one news report that he had “a hard time believing the economy is in recession today, given a strong labor market and corporate earnings growth.”

What causes a recession?

A recession doesn’t occur by flipping a switch. Rather, it’s a tumbling chain of events that shrinks the economy, notes The Washington Post: “If the price of a hamburger goes up, you might stop buying hamburgers. This would impact a restaurant, and that would impact a server.”

The investment and savings app Acorns, which has over 11 million users, says several factors can cause a recession, including:

  • World events such as pandemics
  • High interest rates
  • Real estate declines
  • Manufacturing slowdowns
  • Credit crunches

The Conference Board, a non-partisan, not-for-profit think tank founded in 1916 that analyzes financial trends worldwide, predicted a “relatively short and somewhat mild” recession by year’s end, citing inflation and the Federal Reserve’s “rising hawkishness” in raising interest rates to combat inflation. The Federal Reserve in September raised its key interest rate (the federal funds rate) yet again by 0.75% to 3% to 3.25%, citing the war in Ukraine “creating additional upward pressure on inflation.”

The Federal Reserve often raises interest rates to combat inflation, which the Bureau of Labor Statistics reported had reached 8.2% in September. The Inflation Reduction Act of 2022, signed into law in August, likely will take one to two years to impact the overall economy, experts say.

How often do recessions occur?

To the NBER, recessions are natural, starting at the peak of a business cycle and ending at the trough. “Expansion is the normal state of the economy; most recessions are brief,” the organization says.

Since 1854, there have been 34 recessions of varying frequency, NBER data shows. The two most recent were in December 2007 and during the pandemic in February 2020.

Kiplinger calculated the average frequency at about three-and-a-quarter years since 1857. Holland put this another way, noting, “[O]ur economy was in recession just 8% of the time over the past 30 years.”

How long do recessions last?

Again, that’s difficult to say. Although economists have no way to predict when an economy will rebound, the average length of a recession is about 11 months, The Washington Post says. 

The pandemic-related recession of 2020 lasted about two months, making it the shortest on record. The longest recession, officially called the Long Depression (different from the Great Depression following the stock market crash of 1929), occurred after a stock market panic in 1873 and lasted for over five years.

What are the warning signs of a recession?

To identify a recession, some financial analysts watch for an inverted yield curve instead of fluctuations in the stock market. This occurs when short-term government securities, such as a three-month Treasury bill, yield more than a 10-year Treasury bond, signaling that bond traders expect weaker future growth, according to Kiplinger

Others look for economic signs from top companies, such as reduced capital spending and lower ad sales, NPR says.

The NBER studies several federal measures of economic activity, including real income, employment, and wholesale-retail trade. These include:

Other financial experts notice some of these factors within a particular industry but not others. For instance, the National Association of Realtors (NAR) said this summer that the housing market was in a recession as far as declining home building and home sales, but that home prices were robust.

Existing home sales in September fell 1.5% month-over-month and 23.8% year-over-year, NAR data shows. Yet the median existing home sales price nationwide reached $384,800 — a 6.9% drop from $413,500 recorded in July but still an 8.4% increase from September 2021.

What’s more, 80% of metro markets saw double-digit annual price appreciation in median single-family existing-home sales prices at the end of the second quarter compared to 70% of markets in the first quarter.

What does a recession mean for me?

The uncertainty surrounding a recession has inspired Americans to prepare their finances. In one survey, 89% of respondents said they had taken some action, whether reducing spending (62%), sticking to a budget (39%), or building emergency savings (26%). In another survey, 74% had switched to lower-priced brands or delayed purchases altogether.

Because of its domino-like effects, a recession might hit your household harder in some aspects than others. Here are a few areas where a recession might impact you.

Housing

The housing sector “experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes,” NAR Chief Economist Lawrence Yun said in a statement. “The softness in home sales reflects this year’s escalating mortgage rates. Nonetheless, homeowners are doing well with near nonexistent distressed property sales, and home prices [are] still higher than a year ago.”

Meanwhile, Dietz of the NAHB put the nation’s housing shortage at about 1.1 million homes. “Housing starts had been climbing and finally got to that level to meet demand, but then the Fed started making home-buying more expensive and things have [cooled],” he’s said, according to reports.

Currently, renters occupy about 5% to 6% of the new single-family homes built, compared to the typical 3%, Dietz said. Investors are buying about 5% to 6% of new single-family homes and converting them to rentals, he added.

He expected another interest rate hike in 2023 because the Fed has been increasing rates two to three times faster, with rates unlikely to fall until 2024.

Employment

The unemployment rate remained low in September at 3.5%, dropping 0.2% from August and tying with July’s 3.5% rate, which also tied for the lowest since 1969.

Yet even though the economy added 263,000 jobs in September, some forecasters predict that job growth will drop before the end of the year. Economists at the Bank of America expect some “weakness in labor markets in order to bring inflation down,” CNN reported. The good news is that they predict the unemployment rate will top out at 5.5% next year, far below the April 2020 peak of nearly 15%.

Gas and energy costs

When raising interest rates in September, the Federal Reserve cited ongoing pandemic-related imbalances in the supply chain and Russia’s war against Ukraine as factors affecting global economic activity, resulting in higher energy and food prices. That’s unlikely to change anytime soon.

Gas remains low at the pumps, dropping 4.9% in September, according to the Consumer Price Index (CPI) from the Bureau of Labor Statistics. Yet compared to this time last year, Americans are paying more for gasoline, with the price rising by 18.2% year over year.

The prices of natural gas and electricity also rose year over year, albeit modestly in September compared to the previous month, the CPI shows. The natural gas index rose 2.9% in September, leaping 33.1% from the previous year, while electricity inched up 0.4% in September but 15.5% over the previous year.

Groceries

Americans paid 13% more for food items from grocery stores in September than they did over the past 12 months, although the CPI for the month nudged up just 0.8%, the same increase seen in August. Fruits and vegetables over the month saw the largest price increase (1.6%), with cereals and bakery products not far behind (0.9%).

Healthcare

We’re also paying 6.5% more over the last 12 months for medical care services and 3.7% more for medical care commodities, such as prescription drugs, the CPI shows. Compared to August, Americans paid 0.5% more for physicians’ services in September and 0.1% more for hospital services, although consumers paid 0.1% less for prescription drugs.

Is it good to buy a house during a recession?

With your home among your greatest assets, you might wonder if you should buy a house during a recession or wait.

Recessions can be an opportune time to buy a home. During a recession, economic activity falls and unemployment rates typically rise. This leads to less demand for mortgage loan financing. Less demand generally leads to lower interest rates.

Some pros of buying a house during a recession include:

  • Mortgage interest rates can be lower
  • Less buyer competition
  • More houses on the market provide more buyer options
  • Opportunity for lower housing prices and bargain deals
  • Sellers are often motivated and more likely to make concessions

That said, getting a mortgage can be more difficult for people working in industries especially vulnerable to the impacts of a recession. Mortgage regulations have tightened after previous recessions because of related job losses, and buyers are likely to see more competition from investors flush with cash.

With 44% of Americans surveyed saying they fear not being able to pay their bills during a recession, it’s important not to take on more house than you can handle. Check out how much home you can afford using HomeLight’s Home Affordability Calculator, then see if you have enough of a nest egg to scope out listings using our Down Payment Calculator.

Remember, a home purchase includes costs beyond the asking price, including a real estate agent’s commission and other fees. Estimate how much you’ll need for these additional costs using our Closing Costs Calculator.

Is it good to sell a house during a recession?

That depends. Buyers tend to be selective during uncertain times, so it’s vital to price your home accordingly and not make mistakes in a rush, expert agents say. Try our Home Value Estimator to get a ballpark idea of how your home stacks up under current market conditions, and use our Agent Match to find expert guidance on showing your home at its best.

Even if selling a house during a recession can be less than ideal, you sometimes don’t have a choice. HomeLight’s Net Proceeds Calculator is a helpful way to estimate whether you’ll sell your home at a loss. If you can hold off until the best time to sell in your area, you might be better off waiting. But if circumstances dictate that you have to sell, talk with a skilled agent about navigating your options.

Conclusion: You can be prepared and proceed with confidence

While we might not be in a recession yet, inflation will take a while to get under control, making adjusting your finances even more important. Check out how other people have put themselves on better financial footing, whether that means paying down high-interest debt, strengthening an emergency fund, paring spending habits, or boosting income.

That way, you’ll feel less pressure about handling your expenses — and be better able to make decisions about your home and your quality of life.

If buying or selling a home is part of your upcoming journey, partner with a top agent who can help you successfully navigate a shifting market.

Header Image Source: (Nikolay Loubet / Unsplash)