Does A Housing Recession Mean Home Prices Are About To Crash?

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Why we're doing this show

Hi, I'm Debbie Marcoux, host of the Mortgage Mom Radio show. Every week we bring you the hot topics — what people are talking about in the economy, real estate, and the mortgage market — and we work through them so you understand your opportunities. Could you be buying a home right now? Do you need to do some credit repair? What's a good investment at this time?

If you're on my texting platform you got a message today saying we're talking about whether or not we're in a housing recession. That word has been all over the news for months. Every time you turn on YouTube there's another person talking about it — another financial analyst, another person on stocks, things are going to drop, things are going to fall, prepare for the biggest fall of your life.

As you all know I'm a big advocate of people purchasing homes, especially first-time buyers. So: is right now the time you should be looking into that? What does the Mortgage Mom think? What education can I give you so you feel like you're on the right path?

The article

I want to give credit where credit is due. This is from NextAdvisor, in partnership with Time, and it looks like it came out today, so it's very up to date. The headline is “We're in a housing recession, some experts say. Why there's more to that story.”

It opens: the word of the summer might be recession — but is the housing market in one? The idea gained steam this month as a pair of reports showed signs of changes in the housing market. An index by the National Association of Home Builders found builder confidence falling for the eighth straight month. Then a report by the National Association of Realtors found home sales declining for the sixth month in a row in July, down 5.9 percent from June.

Again, this could be scary. You're hearing it over and over on YouTube, the world is crashing, right? Both reports prompted experts at those organizations to term it a housing recession. But that doesn't mean prices are going to crash. And that's what the Mortgage Mom has been telling you over and over for the last couple of years, and really pounding since the beginning of this year.

Keep going: the NAR report showed the median existing home sales price down $10,000 from June to $403,800 — but still up 10.8 percent compared to a year earlier. This is a report going across the nation. This isn't just LA or Seattle or Las Vegas or Tennessee or San Antonio. These are averages of the United States. So across the country, with all the rate hikes and all the inflation, we're down ten thousand dollars on average on home prices, and we're still up 10.8 percent from this time last year.

What a housing recession actually means

So what does a housing recession mean? It really just means a contraction in home sales over the last six months. A lot of people hear recession and think housing prices are crashing. What it means is that the turnover — the volume of builds and the volume of sales — is getting smaller. Fewer people are moving.

The article quotes Jessica Lautz, vice president of demographics and behavioral insights at NAR: we have seen a slowdown in home sales, and we have seen home builders contracting as well. It's not a recession in home prices. Which drives home exactly what I've been saying.

And then Jeffrey Roach, chief economist at LPL Financial, a national broker-dealer, says the term housing recession is really an offbeat kind of phrase. It confuses it with what a recession is. A recession is about a business cycle in the economy, when the economy experiences a significant decline that is broad-based and lasts longer than a few months. He says: I get where they're going with it — you could argue that the fact that things are slowing down dramatically as borrowing costs rise, that's probably fair. But it's not an equal magnitude.

There's never a bad time to buy

I thought this was a lovely article because it hit everything I've been trying to tell you over the last year, and really since I started this show in 2016. If you go back through the podcast archive you're going to hear me tell you over and over again: buy a home, buy a home, buy a home.

There's never a bad time to buy. There's just a bad time to sell. Real estate is for the long haul. If you buy a home and you stay in it for a significant period of time, prices will go up and prices will come down — but if affordability is there, and you're budgeting correctly, and you are making yourself a home rather than an investment, there is never a bad time to buy.

Supply and demand kept prices up

The next section of the article is headed “supply and demand keep home prices up.” The fact that both home builders and home sellers are experiencing slowdowns at the same time points to why prices are still up quite a bit from last year. Prices are about supply and demand, and while demand has dropped considerably in recent months, supply still remains extremely tight. Much of the supply issue is because of a lack of new construction in the decade-plus since the 2008 financial crisis.

Remember, home builders stopped building. We got into this housing shortage, we stayed in this housing shortage, and then the pandemic came, rates dropped, and everybody who had any opportunity at all to buy wanted to buy. Demand went through the roof. Sellers were getting thirty and forty offers on a listing. They didn't have to take an appraisal contingency, they didn't have to let you do a physical inspection, they didn't have to do anything — if you wanted their house and you wanted a two percent rate.

Right now demand has slowed, but we are still short on inventory. It is very difficult to see housing prices crash when there isn't enough housing for the number of people who need to buy.

The article continues: demand has certainly dropped since January, as continued increases in home prices along with the dramatic rise in mortgage rates — from near 3.3 percent at the start of the year to near 6 now — have made it harder for buyers to afford a home. But while it's down, there are still far more people trying to buy homes than there are homes to buy, due in part to demographics. Many millennials want to buy homes and there are a lot of them at that stage of life. Think about how many people right now are starting families, getting married, having babies, and want to create a home.

What buyers can negotiate now

The article goes on: markets have certainly cooled down, but the average house on the market still gets multiple offers. For home buyers today, they are facing slightly less competition in the marketplace.

This is what we talked about last week. If you're a buyer in today's market you've got more wiggle room. You can ask for people to pay your closing costs so you get into the home with less money out of pocket. You have room to negotiate on price. If the home is priced right it's going to sell and it may still get multiple offers — so make a good, reasonable offer, ask for some closing costs, keep your appraisal contingency, keep your inspection contingency. Do all the things you should be able to do as a buyer, because sellers no longer have the upper hand.

I'll say that we haven't quite turned into a hundred percent buyer's market. I think we're still somewhat more of a seller's market — there are still more buyers than there are properties. But you do have the opportunity right now to ask for closing cost coverage. If you're an FHA buyer and you want a condo in a complex that isn't approved, you have the opportunity to ask for a longer escrow and two weeks for your lender to get that condo approved so you can use your FHA loan. I'll bet there's a seller who'd give you those two weeks, unlike what we saw in 2020 and 2021 when things were absolutely crazy.

So this is a fantastic time to buy. It's a great opportunity to do all of your due diligence and create a home. To have stability. Nobody's going to kick you out. The payment you budgeted for is your payment. Nobody can increase your rent, nobody can tell you to move because they want to sell, nobody can tell you that you've got a new landlord. It's your home, and nobody can tell you to go unless you don't make a payment.

Q&A: what should a first-time buyer do?

Heidi asks: “What do you think a first-time home buyer should do when they're hearing all the mixed information about buying now or later?”

Well, I think they should listen to the Mortgage Mom and go buy a house. But honestly, my education would be to research it yourself. Go look at the statistics. Look at your parents. Look at the home they own and the homes they've bought over time. What was a property worth in the eighties? The nineties? The 2000s? The 2010s? The 2020s? Watch the roller coaster that real estate has taken over time.

You'll actually see that only during the 2008 recession — really, in the last thirty years — did we see property values drop out from underneath us. It is not normal that in a recession we typically see property values decline. As a matter of fact, we sometimes see them increase.

So I don't believe the scare people have about the housing market applies the way they think. Your bank accounts, your cryptocurrencies, your investments, the stock market — that's inflation, and that's a completely separate education you need to go look at. We're definitely seeing massive changes there, because it's directly tied to money. Real estate is something you own. It's a tangible asset. When there isn't enough of it, it becomes scarce, it becomes worth more, and it naturally goes up in value.

Do the research, and I think you'll come to the same conclusion I have. If you buy a home, you budget for it, you make sure it's something you can afford, and you buy something you don't feel scared to be trapped in — somewhere you could stay for the next five to ten years — there should be nothing to be scared about. You're creating a home, and even if values come down, they go back up and they surpass where they stopped the time before. The only thing I see to be scared of is the should have, could have, would have — where rates are today versus where they'll be a year from now, and you scratching your head saying I really should have bought.

And if you don't trust me, that's okay. I'm not here to make you do it my way. I'm here to give you something to think about.

Q&A: first-time buyer loan programs

Ronnie asks: “What loans are out there for first-time buyers?”

Tons. We've got loans where you can get in with three percent down and loans with three and a half percent down — conventional and FHA. We have USDA loans, if you're buying somewhere a bit more rural, where you can get in with zero down. If you're a vet, you can get in with zero down. There's a ton out there.

And being in a market where there's more flexibility for the buyer to get the seller to help, you can ask for closing costs to be covered, which makes it a lot easier. If you're looking at a property at $300,000 or $400,000 or $500,000 — it depends on your market — the math changes a lot with seller help. I've got a buyer right now out in Las Vegas looking for a property around $180,000 to $200,000, and he can find that out in Pahrump. Three percent down on that is six thousand dollars, and we're going to get a seller to pay his closing costs. We might even be able to look at USDA for him, where he doesn't need that six thousand at all.

The bottom line is that you have to call and talk to us about your scenario — where you're looking, your price range, your income, your credit score — and then we can advise you on what's available and what works best.

Q&A: child support as income

Sunshine asks: “Do they count child support as income for a loan?”

Yes, they do. You do have to show me twelve months of history receiving your child support, and the child support has to continue for at least three years. So we look at the divorce decree and the age of the children, and at what the decree says about when child support ends. Sometimes it ends at the child's eighteenth birthday, which is more often than not. Other times the decree stipulates it ends when they finish college. How it's written and when it ends determines whether we can use the monthly income.

So: twelve months of receipt, and at least three years of continuance. Alimony works exactly the same way — before somebody asks, let's throw that in. We have to see the decree, how much you're getting, that it will last at least three years, and that you've been receiving it for at least twelve months. Every now and then we can make an exception at a six-month mark, but they typically want to see twelve.

Q&A: when the payment is more than you can afford

Stacy asks about payments being higher than she can afford at California home prices.

California is expensive right now. If that's the market you're in, we want to look at ways to help you afford it. What areas are you looking in? Would you be willing to do a bit of a commute? Could you look at a two unit, like a duplex, where you might get rental income off the second unit? Could you look at a single family residence with a guest house — sometimes called an ADU — that brings in some rent? There may be ways to strategize around affording the market you're in.

And let me be honest with you: this show is on the air in Seattle, and Seattle is very expensive. I was looking at median housing prices there and they were quite close to what we're seeing in the Los Angeles market. It's expensive out there across the nation, and we get it. The best thing you can do is have a plan. Understand what you're trying to achieve, how much money you need to achieve it, what your income needs to be, what your credit score needs to be, and how fast you can get there. The only way to know those answers is to talk with me or somebody in my office and build the plan.

Homeowners: look at a rental property now

In my opinion, prices aren't going to drop out from underneath us. We're not going to see a massive crash. We're going to see higher rates next year. We might see some appreciation; if not, it slows down. We might see zero. We might even see negative five or ten percent. But it's not going to be anything crazy, and this time next year you're going to be telling yourself you should have bought a home — because rates will be higher, the same home will be harder to afford, and the monthly payment will be more expensive.

The same goes for you homeowners. Rents are going through the roof right now. If you've been thinking about a rental property — could you cash flow on the house you have and go buy a different one? — look into it right now today. Do not put that question on hold. You will never get a cheaper rate on a rental property than what you already have on a mortgage you already hold. Maybe someday rates fall lower than six percent, but six is actually an average rate — it's lower than the average over the last thirty years. So today's rates might be the lowest you'll ever get on another property.

Start thinking about what you can do to create a real estate portfolio. It's a tangible asset that nobody can take away as long as you make payments. Stock markets can crash, crypto can crash, other things can crash. Sure, the housing market can crash too — but this is something you own, that you hold, that you can touch and feel.

Q&A: fixed, adjustable, or interest-only?

Heidi asks: “What's your advice on a fixed rate versus an adjustable or an interest-only loan, and when would you recommend which, especially in this market?”

I always recommend a 30-year fixed if that's obtainable for you. A 30-year fixed will have a slightly higher rate than an adjustable would. Interest-only will be higher again — you can get interest-only on both adjustable and 30-year fixed, and in each case it prices above the version without it.

In my opinion, interest-only and adjustable rates are good for a lot of people. They're not terrible loans. We're not talking about reverse amortization or anything crazy like we used to see in the early 2000s. It depends on the person, their experience, how long they plan to be in the home, and whether they understand interest-only. That's a very serious conversation we need to have with somebody — what does the adjustable mean, what happens when it reaches its maturity date, what happens to the interest-only, how much can the payment change.

Are they good for some people? Absolutely. Are they a great loan product? Absolutely. But my favorite is the 30-year fixed. It's the safest loan you can get into and the very best for first-time buyers, because it locks in that payment. The most important thing in today's world is stability, and a 30-year fixed gives you the stability of your monthly payment — unlike an adjustable, where the payment can change, or interest-only, where you can get past the interest-only period and find yourself in something you can't afford. I like a 15-year fixed as well, but when we're talking affordability, the 30-year is probably the best option.

What home buyers can do

Back to the article. The next section is “what home buyers can do.” Given the high prices homes are still going for, buyers may want to be patient. But for first-time buyers, the price of a house isn't the only part of the equation — rent is going up dramatically too. Even though borrowing costs have risen, in the long run it still may be worth buying a home, given that what's driving inflation right now is rising rental prices. It still may be an opportunity to get out of the pressure of rents.

This is what I've been saying all year. You have to get out of those rentals.

It continues: whether or not the housing market is in a recession doesn't change the guidance for buyers much. She suggests buyers work with experienced real estate agents and mortgage brokers or lenders who know the area and might be able to find deals. Buyers should also consider what they can compromise on, as it may be easier to get a home in a somewhat less competitive area. Something generally has to give for home buyers.

Which is exactly what I said earlier about California. Where are you willing to go? Can you commute? Maybe you wanted the three-bedroom and you're willing to go to the two-bedroom. Maybe you didn't want the townhome and you wanted the single family. We have to talk about where you can compromise.

And then: is now the right time to make the biggest financial decision of your life? Soaring inflation and an economy trending toward a potential recession have many wondering if buying a house is still a good idea. A recession doesn't unilaterally mean a good opportunity to buy a house — that depends on your individual financial situation. You may be in the right position to buy if you have flexibility in your budget, an adequate emergency fund, and sustained income security. Buying a house in a recession, if you can find a house you like for a price you can afford, is a great idea, because you are taking control of your greatest monthly payment.

Again: budget, budget, budget. This is so very important.

Q&A: single mom, paycheck to paycheck

Nora asks: “I'm a single mom. All of a sudden I feel like I can do it — but I'm living paycheck to paycheck and in the red some days. Where should I start?”

Nora, that's a lot of people. I know being a single mom is very hard, and I know living paycheck to paycheck is very hard. It makes you feel like there's no way out. There are ways to do it and there are ways to get you there.

We could look at getting you a little more rural — a longer drive, a longer commute — and possibly into a USDA loan with zero down. We could look at three percent down. Maybe you have a retirement account you could take funds from. Maybe there's somebody in the family who could give you a gift. Maybe it's about putting together a budget to save the down payment. There are down payment assistance programs we could look into if you'd qualify — we have to look at income and we have to look at credit scores. But you've got to start somewhere, and you have to call to find out what your opportunities are.

And I want everybody to hear what I'm saying. It doesn't mean anybody can buy a house. If you want to buy something you have to qualify. Your monthly income has to be enough to pay the mortgage you want. You can't call me and tell me you want a $600,000 house on a very small income — the calculation just doesn't work.

But if you can afford your rent, even paycheck to paycheck, chances are you could probably afford a mortgage in a similar spot. You might have a tax deduction now, and maybe get a bit more back when you file at the end of the year, which makes things a little more affordable. So give us a call and let us figure out what works for you and help you create that game plan.

Heidi added something worth keeping: she was in the same position — a single mom with a baby, on her own — and she bought her first condo with an FHA loan, scraped the money together, and worked up from there. She's three homes on from that now, with equity in her property. I don't know a better way to finish the show.

Q&A: is a $600 HOA too much?

Luke asks about a master-planned community with a $600-a-month HOA.

I'll be honest, I haven't looked into that particular community myself. Anything with a six hundred dollar a month HOA is a very expensive HOA — but I think there are some people who like that, so it really depends. We've got people in high rises in the middle of LA paying close to that if not more. We have people in Orange County in retirement communities paying a thousand, eleven hundred, twelve hundred a month in HOA dues.

It depends on the buyer and on what the HOA is providing. If they've got a gym, a restaurant, lifeguards at the pool — is that six hundred worth it to you? It's not about whether your home will sell for more later because you're in an association. Somebody looking for an association and willing to pay six hundred a month is a particular demographic, and that demographic will continue to be around. That's why they build it and why they create it.

So I don't have an opinion on whether you should or shouldn't buy because it's a $600 HOA. It's more about what the HOA gives you, whether it's worth six hundred to you, and whether it's somewhere you'd want to live. I personally live in an area with an HOA and I pay a bit higher than most, but we've got a guard-gated community and to me it's worth it for the security. That means something to me. So if whatever's going on there is worth the six hundred to you, it's worth considering.

Wrap-up

If you want to be part of the show and ask your questions live, I'm on Wednesdays at 1 p.m. Pacific on YouTube, Facebook, and Twitch — text the word MOM to 844-935-3634, that's 844-WE-LEND-4, for one text a week with a link to join. To reach the office or book a consultation with me or anyone on the team, it's the same number, and you can book right through mortgagemomradio.com. And go look up that NextAdvisor article with Time. It's a fantastic one and definitely worth reading. I hope you have a great one, and I'll be back next Wednesday. Talk to y'all real soon.