How a Potential Recession Should Affect Your Housing Decisions

Imagine your dream house. 

No, really imagine it. Get those doors and those countertops and that third bedroom exactly where you want them to be. Imagine setting aside a little extra money, every month—despite the pandemic, despite your worries about your career, despite everything that’s going on with the stock market.Imagine getting to the point where you’re ready to make an appointment with a realtor. Then imagine that we're going to be in a recession for the next two to five years. What do you do now?

If you’ve been putting off your home buying goals due to COVID uncertainty or career uncertainty or political uncertainty, you might feel a little frustrated about having to add recession uncertainty to your mental checklist. Is it possible to buy a house without worrying about a looming recession? What should you consider before making the move—and how can you avoid spending more than you can afford? 

"Let’s just acknowledge that things are very difficult when it comes to housing costs," says Ramit Sethi, bestselling author and founder of I Will Teach You to be Rich, a (legitimate and useful) multi-course program that helps people get their finances in order, improve their careers and design better lives. "There is essentially no city in the country where someone who makes the median wage can comfortably afford housing."

Sethi recommends keeping your total housing costs below 1/3 of your gross monthly income whenever possible, although he knows this is becoming increasingly hard for most Americans. "If you’re spending 33 percent or more of your income on housing, you’re putting yourself at serious risk. It means you’re not saving as much as you probably should, and you’re not investing as much as you could."

Dana Miranda, CEFP® and executive editor of Healthy Rich, a budget-free financial education resource, reminds us that many people are willing to take these kinds of financial risks in exchange for other lifestyle factors. "A lot of people who live in bigger cities spend 50 percent or more of their income on housing, and that’s not necessarily the wrong decision or a bad decision for them. You have to know what’s most important to you. More expensive housing might get you closer to the job you want. It might put you in the political or social environment that makes you feel safer or gives you a more positive day-to-day experience."

For many Americans, the current day-to-day experience includes rising gas prices, ever-increasing grocery costs and the possibility of recession. How can you make positive housing choices—to buy a home, to continue renting, to consider relocating—when the financial future is so uncertain?

Here’s what you need to know—and what you might want to think about before you make your next move.

Follow the news—and think long-term 

If you’re thinking about buying or selling a home, it’s time to start reading the news a little more carefully. "Be aware of what’s going on," Sethi advises. "Right now as you see companies going through hiring freezes, interest rates going up, you should probably take note of that."

Most people get why it’s important to consider how a recession might affect their career before making any major purchases—but not everybody understands how rising interest rates could affect their home buying decisions. "In terms of housing implications, as you see interest rates going up, typically prices come down," Sethi explains. "Over the last two years we’ve seen historic rises in price, but those don’t go on forever. It’s important for people to understand that if prices go way above the typical growth rate, or way below the typical growth rate, over the long term those tend to correct themselves."

With that in mind, both Sethi and Miranda urge potential homeowners to think long-term. "If it were me," Sethi says, "I would be waiting for housing prices to drop, I would make decisions based on affordability, and I would only buy if it made financial sense and I knew I was going to be there for at least 10 years."

Miranda agrees that you should only buy a home if you plan on living there for an extended period of time—but suggests that buyers consider not only interest rates and cost of living, but also the value that could be generated by moving to a new city or neighborhood. "Where you choose to live shouldn’t be strictly a financial choice," Miranda told us. "There are so many other aspects in your life—if you have children, the school district, who your neighbors are, the environment you’re in, the political environment around you, they all have an effect."

Know your rights—and make a plan 

If you’re currently renting, it’s important to know your rights—especially if your landlord or property owner decides to increase your monthly rent. "Make sure that you know what the rules are in your municipality," Miranda explains. "If they’re allowed to do that, if they’re giving you proper notice, if they are restricted—a lot of municipalities restrict how much rent can go up at one time."

If you need advice, guidance or legal assistance, Miranda suggests looking into your local tenant resource center. "Make sure you’re getting what you deserve so you don’t get pushed out of your place by people trying to take advantage of the market."

Sethi agrees that market forces can make it difficult to find affordable housing—whether you’re renting or buying. "Money and politics go hand and hand. This isn’t just about pulling yourself up by your bootstraps, the local politics of your neighborhood and the NIMBYs that prevent the building of more housing are why you can’t afford housing."

That’s why it’s important to make a plan—whether you’re asking your tenant resource center how to access free legal aid or searching state resources for first-time homebuyer opportunities. You should also make a financial plan that helps you work towards your housing goals, whether you’re hoping to stay in your current home or purchase a new one.

"Use the CEO strategy: Cut Costs, Earn More, Optimize Spending," Sethi advises. "Cutting costs for housing means you can move to a different area, or get roommates if that would be feasible for you. If you want to earn more, it’s a great labor market to find higher wages and get a better job right now. You can also optimize your spending. I often find that people can save thousands of dollars by looking at where their money is going and redirecting it."

Run the numbers—and save extra cash 

Many would-be homeowners do just enough math to determine how much they can afford to put towards their mortgage every month. If you’re planning on buying a home, make sure you include all of the other costs of homeownership as well—boilers breaking, pipes leaking, and so on—and ask yourself how much money you’d need to set aside to cover those expenses.

"The cost of owning a home isn’t just your mortgage, interest, and taxes," Sethi explains. "It’s also the sprinkler repair you had to make. It’s also repairing your roof which might cost $19,000, six years from now."

Some people tell themselves they’ll pay any necessary home repairs out of their emergency fund—but if you’re planning on becoming a homeowner, you might want to set aside a separate fund just for home repairs and home improvements. How much should you put in your homeowner fund? "You should be prepared to set aside an extra 50 percent of your mortgage costs every month to cover the total cost of homeownership," says Sethi.

If that number makes you a little uncomfortable, that’s fine—in fact, it could be a good indicator that you’re not in the best financial position to buy a home yet. Even if you’re confident that you can afford a new home in a recession-prone economy, it’s still worth asking yourself whether you’re making the right move. "Just because you can afford a house doesn’t mean you need to buy," Miranda advises. "You can do anything you want with your money. You don’t have to grow."

That said, you’re going to want to start setting aside a little extra cash for the cost of living—even if you plan on staying exactly where you are. "Most of the time, homemaking involves spending money," Miranda says. Whether you’re looking into a three-bedroom house or shopping for room dividers, creating a comfortable living space for you and your loved ones nearly always costs something. 

And, since housing is getting more expensive along with everything else, you might as well start saving now. 

More advice this way:

Dwell How-To: Buy and Sell Your Dream Home

10 Critical Questions to Ask Yourself Before Buying a Home

Photo by: Jeremy Erickson via Bloomberg/Getty Images