What’s All This Talk About A Recession?

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The U.S. housing market is undergoing a rebalancing following five years of appreciation and growth. Never before has there been so much equity in the home market or inventory so low for so long. The past couple of years have been quite challenging for many with COVID and now inflation surging and 30-year mortgage interest rates poking over 7%. The question everyone seems to be asking is: ‘Are we headed into a recession?’

The answer is a definite maybe and for those that weathered the past few recessions the signs are enough to make us all feel especially nervous and uncertain. We want to set the stage in this blog for future blogs that will address questions that both homeowners and homebuyers are asking such as: What will happen to my home equity and how can I protect it? Should I hurry up and sell now, but where do I go? Should I jump in and buy ASAP, or cool it until things look more stable?

Read on for an expert-backed guide of 5 ways you can prepare for a recession — before one comes.

The changes in the economy since the first of the year are unmistakable and the question being asked everywhere today is “are we headed for a recession?” Although we cannot answer that question directly, we can look at some of the signs and suggest some proven ways to prepare in case recession is in our immediate future. Some experts claim we have already entered a recession signaled by the rising inflation that has us all spending more on food, gas, and other necessities.

It is at times like this that we want to turn to people that have weathered through recessionary periods and have a good sense of what works and what doesn’t. We are fortunate to have Geni Manning, Team Leader of the Geni Manning Group, to answer some key questions. See more about Geni at the end of this blog.

What Is A Recession?

The ‘textbook’ answer to that question of ‘what is the definition of recession is often expressed as: “At least two consecutive quarters of negative growth in the nations’ gross domestic product (GDP)." As a reminder, GDP is the net cash value of everything that comes out of, or is produced, in an economy. In other words, a recession would be an economic downturn lasting at least six months. According to the U.S. Bureau of Economic Analysis (BEA) both the first and second quarters of 2022 have been negative.

The National Bureau of Economic Research (NBER), the agency responsible for deciding on what counts ‘officially’, defines a recession as: “A significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Are We Going Into A Recession?

As of July 2022, the U.S. GDP growth has been negative for two consecutive quarters and the current state of inflation that has risen to near 8.5%, along with the increases by the Federal Reserve in the Federal Funds Rate signals more inflation and higher interest rates for a while. In addition to increasing mortgage interest rates this also typically means higher capital costs for businesses’ which is a disincentive to job growth and expansion.

The good news is that unemployment is still low, particularly in the DFW metroplex, which is a key metric for determining the “health” of the economy.

Geni is advising her clients that we are NOT facing a replay of the 2008 recession and crash: “One of the major characteristics of the 2008 recession was that there was little equity in homes,” she says. As Geni notes, “The 2008 market crash was triggered by risky lending practices that have been abolished which in turn led to mass foreclosures because people had literally nothing to lose by walking away from their home.”

This is the difference between then and now as she explains. “Most sellers have as much as 50% equity in their property, which is wonderful for homeowners. They’re able to sell their property and make a profit, as opposed to having their property go into foreclosure.”

Future market conditions aren’t set in concrete, but there’s no need to panic. Instead, we suggest you review your financial situation and prioritize increasing your stability.

5 Ways To Prepare For A Recession

Building up financial stability and developing a long-term plan is key to surviving volatile market conditions. “These things aren’t really any different than the things you should be doing every day,” says Geni, “Whether this recession comes or not.”

Here are five ways to ‘rebalance’ your finances ahead of a recession:

1. Perform An Honest Assessment Of Your Financial Health

Recessions can be damaging to people who are financially overextended or who have their money tied up in risky assets. As Warren Buffett is quoted, “Only when the tide goes out do you discover who’s been swimming naked.” In a positive economy people are less concerned over financial damage from being overextended because borrowing can benefit when done wisely.

2. Review your budget

Back to Basics: “Ensure you’re living within your budget. Even if recession isn’t approaching, it’s indispensable advice,” says Geni. “Revisit your household budget to make sure your needs are being accounted for,” she says, "things like housing, food, and fuel: things you can’t live without. If necessary, eliminate some of the ‘nice to haves’ or discretionary wants in your life.”

3. Trim and Trim Again

Revisit your budget to see how much of your income goes toward expenses, how much goes toward discretionary spending — that’s shopping, dining, or any other spending you do that isn’t necessary — and how much you are putting toward savings each month. Spending less than you earn and saving the difference is key to increasing financial resilience, recession or not.

4. Pay Off High-Interest Debt

If you’re carrying high-interest debt, such as a credit card balance or a personal loan, prioritize aggressively paying it down (without overextending your budget overall). Given that recessions are often linked with increased federal interest rates, you should focus on erasing your highest-interest debts first. Check your credit card debt and as quickly as possible bring the ‘credit utilization’ to around 10% or whatever you could pay off quickly if necessary.

5. Increase Your Emergency ‘Rainy Day’ Fund

Increased unemployment often accompanies an economic recession. In case your income were to be cut off or reduced, you should start buffering your emergency savings now.

“Aim for six months of living expenses saved up," says Geni, "that’s enough for most people to sleep easier through volatile market conditions.”

Make sure you’re not investing this money in the market! In a recession this can be a big mistake when selling stocks at a market low means taking a loss when you can least afford to be hurt. Keep your funds liquid in an interest-bearing savings account. 

Stay tuned for future blogs in which we will be discussing the effect of a possible recession on home sellers and on home buyers. The housing market is going through a rebalancing and is quite obviously has shifted; however, market forecasts are indicating a healthy prospect for buyers and sellers in the DFW area regardless of any national recession. See our other blogs we post regularly to help you remain informed and to receive some helpful insights whether you’re a seller, buyer, or investor.

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ABOUT GENI MANNING: Geni’s career started as a custom home builder and interior designer. Now as an accomplished  Realtor with a proven track record, she has been a recognized leader in the real estate industry in North Texas for four decades. Geni has been featured in magazines: Texas Realtor, Plano Profile, and D Magazine’s ‘Best Real Estate Agent.’ She has earned the top 10 nationally recognized real estate designations, is an author of six real estate books, a popular guest on radio as a real estate expert, and a featured speaker at community events. Simply put, Geni is a ‘Master of Residential Real  Estate.’