My wife and I have started looking for houses. But I’m not sure it’s a good idea. A recession is coming. Interests rates are low. Be frank with me: Is this a really dumb time to spend a bunch of money on a home? Should we wait? —Sam R., Orlando, Florida
Let’s start with the disclaimer: That the U.S. economy will sputter into a recession isn’t yet a forgone conclusion.
Now that that’s out of the way, I’ll state the obvious. It’s hard not to hear about the deluge of troubling economic news — the slowdown in second-quarter GDP, the ongoing trade war with China, the near-recession in Europe’s largest economy — without getting jittery. Real jittery.
So you’re right to give the economic climate we’re in some serious thought before heading into a major financial decision. I’d be foolish to give you the clear-cut answer you’re probably hoping for here. But sometimes questions have a way of answering themselves, and the fact that you’re hedging this much should tell you something.
First and foremost, you should ask yourself whether you need a new house at this exact moment. Are you moving because you have a kid who’s heading to school and you want to put down roots? Or is home-ownership simply a goal you’ve always had stuck in the back of your head — a reassuring symbol that you’ve “made it”? If it’s more the latter than the former, I’d be hesitant.
Then there’s the question of job security, both for yourself and your wife. Unless you work in a relatively recession-proof sector like health care or education, it’s hard to feel confident about the next 12 or 18 months. The last thing you want is to take on the biggest loan or your life, only to realize you can’t pay it back.
And then there’s the matter of how much you can put down on the home. With FHA mortgages, for instance, you can scoop up a property with as little as 3.5 percent down. But that’s not leaving a whole lot of cushion if an economic downturn takes the housing market with it (this could end up being one of the rare cases when it’s not the other way around). The more you can afford to spend upfront while nursing a healthy emergency fund, the more confident I’d feel about making the plunge.
The good news here is that if there is, in fact, a housing market downturn, it’s not likely to be the nosedive we experienced a decade ago. It’s true: Lenders have been slowly loosening their standards in what seems like a giant case of amnesia regarding the last crisis. Some are even getting into subprime mortgages again (though they’re more likely to call them by the more innocuous term “non-prime loans” this time around). However, the so-called “liar loans,” requiring little if any documentation, have, graciously, receded from the scene.
And the reality is, the market dynamics are a lot different than they were back then. A decade ago, homebuilders were putting up houses as fast as they could in order to keep up with demand. These days, we’re faced with a limited inventory in many parts of the country. And that will likely prevent home values from falling off a cliff.
Of course, your situation touches on an even larger question about whether homeownership in general is as wise as most people assume. The fact is, over the long haul, home prices don’t increase much beyond inflation. When you factor in all the maintenance costs you’re likely the shell out — the broken A/C unit here, the leaky roof there — it’s by no means a slam dunk. It’s the reason Nobel-winning economist Robert Shiller — the guy who helped create the widely used Case-Shiller index of housing prices — is famously apathetic about home ownership.
Look, at the end of the day, going home-shopping is your decision. It’s something you have to be comfortable with. But it’s a fool’s errand to go down that expensive path without thinking about the contingencies. You don’t want the American Dream to turn into a nightmare in case the economic hiccups of late portend something even worse.