Buying a home before a recession could add risk to your finances, especially if you are living within a tight budget.
Mortgage rates have surpassed 6% with the national average at 6.7% this week, the highest since 2007, according to Freddie Mac (FMCC). Higher mortgage rates add hundreds of dollars to a typical monthly payment, which can add up to thousands of dollars a year.
Every major housing forecaster projects that home prices will continue to rise on an annualized basis, albeit at a much slower pace. While people who decide to purchase a home at today’s higher rates may have an opportunity to refinance if rates decline, those who wait till rates are lower likely will be paying more for real estate.
Whether mortgage rates could decline or by how much remains unknown and depends largely on how many hikes the Federal Reserve will make in its efforts to curb high inflation rates.
Since there are two more Fed meetings remaining for the rest of the year, “that indicates at least one more 0.75% hike is in the offing,” said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data company.
That could “further strain on the budgets of households with variable rate debt such as home equity lines of credit and credit cards,” he said.
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Fed’s Impact on Mortgage Rates
The Fed now sees its benchmark rate reaching nearly 4.5% by year-end compared to a median projection of 3.4% in June and just 1.9% back in March, McBride said.
While the Fed funds rate doesn’t directly impact mortgage rates, it influences the mortgage-bond investors who set interest rates by the yields they are willing to accept for purchasing securities. When inflation is high, they typically demand higher returns, putting upward pressure on interest rates.
“How high interest rates eventually go and how long they will have to stay there are almost entirely dependent on the path of inflation in the months ahead,” McBride said. “The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases. They’ve been playing catch-up ever since. And they’re not done yet.”
The real estate market has also started to cool considerably. Buying a house now could mean paying for a more expensive selling price and putting down a larger down payment and obtaining a higher mortgage, all which could impact a budget and even retirement savings.
Prices have already begun slowing – S&P CoreLogic’s latest Case-Shiller U.S. National Home Price NSA Index reported on Tuesday that home prices gained 16% in July from a year earlier, a slower pace than the 18% annualized gain in June.
The National Association of Realtors reported pending home sales dropped by 2% in August from the prior month, while existing home sales fell by 0.4%.
Economists and fiscal policy experts disagree on whether the U.S. economy already is in a recession or is headed towards one later this year or at the beginning of 2023.
Goldman Sach’s Hatzius On a ‘Soft Landing’
The odds of a recession have risen to about 30% over the next 12 months, Jan Hatzius, chief economist of Goldman Sachs said in a September podcast. The economy may be able to absorb the Fed’s monetary tightening without tipping into recession, he said.
The U.S. economy might pull off a soft landing because “we're seeing some signs of progress in a number of places,” Hatzius said. “A lot of these things are pretty tentative, but it's more visible than it was three or six months ago. So, yeah, I would say I have gotten a little more confident that we'll manage to pull off a soft landing or softish landing. Doesn't mean I'm confident, but a little more confident.”
Wells Fargo said it has been forecasting that the U.S. economy would slip into recession in 2023 since June. Its latest forecast calls for the recession to start during the first quarter. Much is riding on whether the policy-setting Federal Open Markets Committee, or FOMC, can vanquish high inflation.
“The current environment of high inflation has two effects that both weigh on growth prospects,” wrote Jay Bryson, chief economist for Wells Fargo. “Not only has skyrocketing inflation caused the FOMC to pivot to a hawkish policy stance, but it has eroded real income in recent quarters.”
The recession will cause consumer spending to contract, but the downturn “should not be deep or prolonged because the underlying fundamentals of the economy, especially the relative strength of balance sheets, are reasonably sound at present,” he wrote.
A recession could lower both housing prices and mortgage rates as demand for home buying will decline even further.
“The direction of mortgage rates – upward or downward – is the prime mover for home buying, and decade-high rates have deeply cut into contract signings,” said Lawrence Yun, chief economist for NAR. “If mortgage rates moderate and the economy continues adding jobs, then home buying should also stabilize.”
Yun expects mortgage rates could rise to close to 7% in the coming months.
“Only when inflation calms down will we see mortgage rates begin to steady,” he said.
In 2023, Yun foresees slower price appreciation in homes and a decline in the number of homes being sold.
“Next year, the annual median home price is expected to rise by only 1.2%,” he said. “Home sales will pick up in the second half of 2023, but will be down by 7.1% overall.”
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