What would a recession mean for the DC housing market, and how can I be prepared?
Articles and analysis predicting an imminent recession seemed to dominate the news this summer. All of the speculation -- including talk about inverted yield curves and other signals -- can leave the average American understandably confused and concerned. In particular, homeowners and buyers considering making their first purchase might wonder what this means for property values and interest rates.
To help you shift through all the noise, here is a brief synopsis of some of the expert commentary about the economy, how a recession might affect the DC housing market, and what you can do to prepare:
Experts are divided on whether there will be a recession in the short term, and although a recession is likely at some point, no one knows for sure when it will hit. This is not surprising: markets go up, and markets go down. There are several indicators of a coming market correction, but don’t trust anyone who tells you they know when -- or even if -- it will happen. For example, the Chair of the Federal Reserve, Jerome Powell, recently signaled that a recession is not imminent, and instead we can expect slower but steady growth.
The cause(s) and impact of the next recession will be different from the last. The 2007-09 recession was sparked by a dramatic correction in the housing industry. The next slowdown is far more likely to be the natural end of a long period of economic expansion over the past decade. It could be precipitated by the exchange of higher tariffs between the United States and China are expected to lead businesses to scale back on investing and hiring, causing the economy to slow down. The 2007-09 was also much, much worse than the average recession.
If a recession comes, it is very unlikely to be as rough on the housing market as the 2007-09 recession. The 2007-09 crisis was precipitated by gross speculation -- and sometimes outright fraud -- in the mortgage industry. Thanks to tighter lending standards and new regulations in the wake of the 2008 mortgage crisis, curbing most of the shady and reckless practices. The next contraction will likely be much milder on the housing market.
Interest rates are likely to remain low for the rest of the year. 2019 has been a great year for mortgage rates -- the best year on record since 2011. Interest rates have been holding between 3.5-4% over the past couple months, are expected to remain low for the rest of the year.
The DC area often experiences milder recessions compared to the rest of the country. Unlike the manufacturing or agricultural sectors which fluctuate based on global markets, government spending has a history of remaining steady, or even rising, during a recession. That’s good news for government employees, contractors, and local businesses serving the DC area.
Don’t expect DC housing prices to fall in a recession. Home prices have been hitting new highs in many coastal cities (DC, NYC, LA, SF), but that doesn’t mean the mortgage lending crisis is back. Prices remain high in many urban areas because of a much more fundamental issue: there are simply not enough homes. Despite the plethora of construction cranes dotting the landscape, the District is not building fast enough to meet it’s population growth -- projected to top one million residents by 2045.
WHAT DOES THIS MEAN FOR ME?
Be patient, and don’t panic. Markets go up and markets come down, but as the saying goes, “slow and steady wins the race.” Consult your financial planner and accountant to make sure you are prepared for an economic downturn - before it happens.
Get the fundamentals right. Most personal financial experts agree on some basic principles in preparation for a recession: build emergency savings, lower expenses and debt, and confirm your investments match your goals and tolerance for risk.
Consider refinancing your mortgage. If you are planning on staying in your home for the next few years, now is a great time to lock in a lower-interest rate. Use an online refinancing calculator to help you determine how much you could save and the break even point for the investment.
I hope this shed some light on what experts are saying about a possible recession and what it could mean for DC housing. What to read more? Here are some of the articles and analysis I leveraged in drafting this post:
3 out of 4 economists predict a U.S. recession by 2021, survey finds
New Housing Construction Continues to Lag: Building Permits vs. Job Growth 2019
The DC Region Faces Significant Housing Shortage in Coming Decades, Study Says
State of the Capital Region in 2019: Housing Growth and Affordability
Most importantly, remember that I am always available as a resource! Don’t hesitate to reach out if you have questions about the housing market, are making plans for your next home improvement project, or are looking for referrals to great mortgage lenders, contractors, or other experts.
PC: Getty Images