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As storm clouds gather on the economic horizon, here are some steps you can take to prepare to get your “house” in order

• Coronavirus outbreak’s rapid and global expansion has hampered interconnected economies
• U.S. COVID-19 cases are rising across multiple states
• Companies and consumers are curtailing events and cutting spending, raising the specter of economic slowdown
• Federal Reserve cuts funds target rate by 50 basis points to shore up financial markets and economy
• Consumers can take active steps to prepare for a downturn or potential recession

What a difference a few weeks can make! We started 2020 on a hopeful economic note, expecting a solid—if moderate—continuation of the longest U. S. expansion on record. Interest rates were hovering in low ranges, consumer spending proved solid during the holiday season, and the inventory shortage and accompanying affordability challenge seemed the main obstacles in real estate.

The outbreak of COVID-19 in China, followed by an expanding global epidemic and rising fatalities have significantly changed the health, social and economic landscape globally. The past two weeks saw a deepening of broader responses to the virus, with clear implications for the economy. On March 3, the Federal Reserve announced a surprise cut in its short-term interest rate. The 50 basis point cut was the largest reduction in borrowing costs since the 2008 Great Recession, and underscored the Fed’s concern about the severity of the coronavirus’s expansion and likely impact on the global and U.S. economies.

Given the rapid and large-scale growth in coronavirus cases, and the broad-based cuts in spending stemming from the epidemic, a slowdown in economic activity seems inevitable with talk of a recession increasing.

In the United States, an economic recession is declared by the National Bureau of Economic Research. Traditionally, it is marked as a period of two consecutive quarters of decline in the gross domestic product, although the Bureau takes a wider array of factors into consideration when making the determination. Intrinsic in this process is the fact that an economic recession occurs well before it is declared. Historically, no two recessions have been alike. However, they tend to have similar side effects: rising unemployment, slow or no wage growth, declining prices, shrinking credit availability.

The last recession, in 2008-09, is considered the second-worst economic contraction in U.S. history, and its effects still linger in our collective memory.

With this in mind, we thought it might be helpful to share our perspective on how a recession may impact the housing market, and how you can prepare for it.

As consumers and companies cut back on travel, conferences, restaurants, hotel and other spending, economic activity will slow down. In addition, as people are spending less time in public places, foot traffic at open houses is likely to lessen. The cumulative impact of shrinking activity will translate into fewer sales.

Plan for it

As the popular saying goes, “failure to plan is planning to fail.” Life events and circumstances can make planning for all outcomes nearly impossible. A plan does not have to be overly complex, and should take into account your own circumstances, life stage, goals and resources. Simply taking stock of where your income is coming from, where your expenses are going, and asking yourself how you would respond were that money flow to stop, can put you on the planning path.

During economic recessions, as credit tightens and incomes flatten or decline, expenses continue. A major threat during a downturn is the loss of a job and income stream. We all should plan today for that possibility by saving. Traditionally, financial planners recommended enough cash to cover three to six months of expenses. However, during the 2008-09 recession many people found themselves unemployed  for one year or longer, highlighting how important it is to have savings to fall back on. 

It’s important to start by assessing your financial situation — are you early in your career or nearing retirement? Do you have family and people who depend on you from a financial perspective? Jot down how much you earn and how much money you bring home after taxes. Then compare that figure with how much money you spend on housing, utilities, food, transportation, travel, entertainment, gifts, charitable donations and other items. Determine which are fixed expenses and where you can make cuts, if necessary. How large is the difference between money coming in and money flowing out?

Tips for homeowners:

Sixty percent of homeowners have mortgage debt which comes into focus when economic times are uncertain. For most Americans, a home is the largest asset and will factor prominently into your financial plan. As a homeowner, you should consider the following:

• Establish an emergency fund: A good rule of thumb is to have at least six months worth of living expenses saved in the event you lose your job. If you’re a homeowner, planning to have enough cash to cover your mortgage and unexpected home repairs for 6-12 months is prudent. It may not be feasible for everyone to save enough money to cover a year of unemployment. But, combined with the analysis to manage your spending, it is a goal worth aiming for.
• Look for ways to reduce your expenses: Mortgage rates have fallen to historic lows in the wake of investors’ rush to the safety of bonds. There may be an opportunity to lower monthly payments by refinancing, or to make monthly payments more predictable by switching from a variable to a fixed rate mortgage while rates are low. Often there are fees associated with refinancing so you will want to think about those fees in terms of how they compare to what you’ll be saving over time and how long you think you’ll live in the home. If it costs you $2,000 to save $200 a month, then after you’ve lived in the home for just less than a year, you’ve saved enough to offset the fees which probably means the refinance makes sense. If you’re not sure that you’ll be in the home long-term or if it will take you a longer time to recoup the fees with your monthly savings, then refinance may not be the best option for you. Also, it’s important to shop around for mortgage loans and make sure you are comparing apples to apples on the interest rate as well as any associated costs. Check rates or use a calculator to see if refinancing makes sense.
• Consider your home an asset . Understand how much equity you have in your home and research what rates look like for home equity loans. In the event of a job loss, it could make sense to tap into the equity in your home. Check with a financial advisor to see if this might be a good option for you.  Tools like MyHome, which gives a view into your property value and equity, can be a good place to start.
• Early payoff. If you’re a long-time homeowner there may be an opportunity to pay off your mortgage or switch to a shorter-term loan. Those in a 30-year might be able to switch to a 10- or 15-year mortgage at a lower rate. This can help reduce monthly payments or eliminate your mortgage debt, placing your financial situation on a stronger foundation.

Tips for potential buyers heading into the spring home buying season:

Although most people think of a recession and immediately conjure negative images and emotions, it is worth keeping in mind that these can also be periods of opportunities, especially if you are prepared. As the last recession demonstrated, while asset markets declined, many prepared buyers found treasures, often in low priced homes. If you’re thinking about buying a home, here are some things to keep in mind:

• Do your financial homework. It’s important to understand your monthly expenses and how much you can comfortably afford. If you’re not feeling confident or comfortable that your income is stable, it might be best to press ‘pause’ on your home search.
• Know what you’re looking for. Have a short list of your preferred neighborhoods, home size, features and commute time to help narrow down your search. Understanding the market will help you identify a great buy or hidden gem, as many prepared buyers did during the last downturn.
• Be ready to move quickly. Be prepared with pre-approval and/or pre-qualification in case your perfect home comes on the market and you need to move quickly to beat out other offers.
• Be patient. Housing inventory has been declining at double-digit rates for the past seven consecutive months, leading to a noticeable shortage of homes for sale at all price points, but especially in the affordable range. In addition, there is a shortage of 3.8 million new homes on the market, which has been pushing the search time to over a year for a quarter of first-time buyers. In these market conditions, it’s important to be prepared but also understand that finding the perfect home might take some time.

Whether you’re a homeowner or looking to invest for the first time — the important thing to remember is that you can plan for a recession, and it’s never too early to do so.