Should I Sell My House Before a Recession?

When the market appears unstable and the possibility of a recession becomes more than a headline, many homeowners start getting anxious and wonder if they should sell their house before the market crashes.

The decision to sell a house in preparation for a recession isn’t simple and can have lasting impacts on your financial standing. While selling before the market crashes might mean that you make more from your sale, other factors might mean that you end up in a worse position in the long term. Exiting the real estate market can have very real, lasting consequences.

Most economists agree that the real estate market isn’t going to crash anytime soon. However, we want to weigh the pros and cons of selling your house before a recession and give you the tools to make the best decision for your circumstances.

What Happens to House Prices During Recession?

A true recession happens when the economy shrinks for two or more quarters in a row or if the US GDP shrinks two quarters in a row. It’s the opposite of high inflation. So, a recession can either be a few months or go on for several years.

The shortest and most recent recession (lasting just two months) in US history happened in 2020 as a reaction to the COVID-19 pandemic, and the longest recession started in 1873 and lasted five years.

Since the Great Depression, recessions have largely been becoming less severe, with the exception of the financial crisis of 2007, which was driven by irresponsible lending standards and a lack of government regulation.

The housing market has historically reacted differently across most recessions. Home prices may fall due to decreased buyer demand, driven by higher unemployment, a drop in household income, and reduced consumer confidence.

When consumer confidence falls, household savings tend to increase as people prepare for potential financial hardship. Consumers worry about the economy’s future and hesitate to make big buying decisions.

Additionally, the rate of foreclosures typically increases during a recession, especially if unemployment rises sharply. This can further depress home prices, especially in areas with high foreclosure rates. However, there is another factor comes into play that helps elevate home prices.

When the economy dips into a recession, the Federal Reserve (which is the body responsible for setting the federal funds interest rate) reacts quickly. A healthy economy isn’t shrinking but also isn’t growing too quickly (which is called high inflation).

To correct a recession, the Fed helps add money to the economy by lowering the federal fund’s interest rates, which, in effect, lowers interest rates for businesses and homebuyers. A lower interest rate makes it more affordable to borrow large sums of money, which can help reignite the economy during a recession and make buying a home more affordable.

How quickly and aggressively the Federal Reserve drops its interest rate will significantly impact the housing market. Quickly dropping the rate will give mortgage lenders more wiggle room with mortgage consumer interest rates to accommodate their risk.

While the housing market might take a hit during a recession, a major real estate market crash isn’t guaranteed. Homeowners should be wary of a recession, it doesn’t necessarily mean their home’s value will plummet. Before making any rash decisions, it’s important to consult with real estate professionals in your area to gauge their opinion of the market and buyer confidence.

What Will Happen to Home Prices if We Go Into a Recession Now?

The story of our current interest rate environment has been repeated hundreds of times. To combat inflation, the Federal Reserve has held interest rates at a 23-year high for over a year. Historically, when interest rates are high, the housing market takes a major hit (as we saw during the 2007 housing market crash). While there have been some modest corrections during this period, the US housing market has been resilient and has even grown in many cities. This is largely due to the severe housing shortage across the country.

While high interest rates have dulled buyer demand, there are still enough buyers in the market who are hungry for new homes. Furthermore, potential sellers are choosing to stay current with their low fixed-rate mortgages, which means there is even less supply in the housing market.

Our current economy and housing market are unlike any we have seen before. If we go into a recession in the coming months or even years, it’s reasonable to expect the Fed to drop interest rates, making borrowing more affordable. As a result, buyer demand will increase, and it’s likely that housing prices will actually go up despite the recession.

Pros of Selling Before a Recession

Selling your house before a recession might be a smart idea for those who are already concerned about their job security or financial standing, those who are risk-averse, or those who were already planning to sell their home in the coming year. Here are some benefits of selling before a recession.

Maximize Home Value

When a recession occurs, the housing market usually takes a hit. How bad that decline is depends on your local market and the recession’s severity. In an average recession, home prices may decline by around 5% to 10%. The severity of the decline depends on factors such as the level of overvaluation before the recession, interest rates, and the overall economic impact of the recession.

If your primary goal is to maximize your house’s profits when you sell, you might want to consider selling your house before a recession hits. This is especially true for owners of investment property that don’t have a long-term hold strategy or with negative cash flow.

Selling before a recession will ensure a higher sale price than selling in the middle of one. For some home sellers, this gives them better financial security.

Avoid Negative Equity

Negative equity is the term used when a homeowner’s mortgage is higher than their home’s value. This happens when homeowners buy or refinance during an inflated housing market and property values drop.

Continuing to pay a mortgage on a home worth less than the amount owed can create financial strain, especially if your budget is tight. Negative equity can also have a psychological impact, leading to feelings of being trapped or making it harder to justify staying in the home.

Negative equity can become a problem if you:

• Need to sell due job relocation or other life change. This could force you to bring money to the table to pay off the loan or explore alternative options like a short sale.
• Can no longer make your mortgage payments and put in a position where you have to short sale your home.
• Want to refinance to take advantage of lower mortgage interest rates.

While negative equity on your primary residence is stressful, it doesn’t necessarily mean you have to sell. Typical mortgage contracts do not include a clause that requires homeowners to add equity to their homes if they become underwater. The mortgage agreement is based on the original terms, and as long as the homeowner continues making their monthly payments as agreed, the lender cannot demand additional equity.

Reduce Financial Risk Without Mortgage Payments

Selling your house before a recession can be a strategic move to reduce your overall financial risk. If you’re worried about the uncertainty of the market and how it might affect your financial stability, selling before the recession allows you to lock in your home’s current value. Additionally, selling before a recession can reduce the impacts of a potential job loss or significant reduction in income.

If you sell your home before a recession, you can reallocate the proceeds from the sale into more liquid or recession-resistant investments. This strategy can help you maintain a more flexible and resilient financial portfolio, enabling you to weather the economic downturn more effectively. For some, it may provide a sense of security and help avoid some of the more severe consequences of an economic downturn.

Cons of Selling Before a Recession

Selling a house with the anticipation of beating a recession might seem like a good idea, but it’s not without its downsides. Before you prematurely sell your home, ensure you understand the negative financial implications of leaving the housing market.

Market Timing

Many people who sell their house before a potential recession do so because they are worried about market timing. If you are already planning on selling your house in the next year and are seeing signs of an economic downturn, then selling now might be the right decision. But it also could end up being a costly decision.

Even the most experienced economists are often wrong about the direction of the economy and housing market. For example, at the onset of the COVID-19 pandemic, many homeowners, buyers, investors, and economists were worried about a major real estate market crash. However, after a brief dip in the first couple months of the pandemic, we actually saw record-breaking growth in home values across the country. Home sellers who acted early out of fear missed out on incredible gains during the pandemic housing boom.

Market timing has more to do with luck than being on top of market trends. Today, even if the US economy were to go into a recession, the Fed would likely lower interest rates, which would improve real estate market conditions.

Cost of Selling

While selling your house before a recession might seem prudent to protect your financial security, many homeowners overlook the cost of selling their house. When you sell your home, you are responsible for paying real estate agent commissions, closing costs, repair bills, staging, moving costs, and potentially capital gains tax. Furthermore, if you sense a recession looming, so will others. As a result, there may be fewer buyers in the market, which could limit your sale results.

Selling a house comes at a considerable cost and leaves you open to the risk of either selling at a discount or missing out on future growth. And what many sellers forget to factor in is that they still need to pay for housing, either by purchasing a new home or renting. The costs of selling might outweigh many of the benefits of selling before a housing market crash.

Finding a New Home

After selling your home, you’ll need to secure new housing, which could involve either renting or buying another property, and neither of these options is free. Buying in a tight market could mean overpaying or being unable to find a home that fits your needs; plus, you’ll still be vulnerable to the impacts of a recession. Renting is usually a temporary solution, and your rent could even be higher than your previous mortgage payments, depending on market conditions.

Factors to Consider When Deciding

Deciding if you should sell before a market crash will depend on your local real estate market, personal circumstances, and future plans. While holding onto a house might be right for someone else, for you it might not be the safe choice.

Current Housing Market Conditions

Real estate market conditions can change quickly, but there are usually indicators well before a major market shift.

Some local market indicators that you can keep an eye on are:

• Unemployment Rate: The unemployment rate in your area indicates how healthy the job market is. Widespread job losses will negatively impact the housing market, so paying attention to the unemployment rate and any potential downsizing of major employers is helpful.
• Delinquencies: A noticeable increase in mortgage delinquencies (late payments) can signal financial stress among homeowners, which may lead to more foreclosures and contribute to downward pressure on home prices. To get local data, look for state or local housing authorities that publish data on mortgage delinquencies within their jurisdictions.
• Foreclosure Rates: An uptick in foreclosure rates can flood housing inventory with distressed properties, driving down prices and potentially triggering a broader market decline.
• Vacancy Rates: High vacancy rates, especially in rental properties, can indicate oversupply and may signal a pending correction in the housing market.
• Regulatory Changes: Tightening lending standards or increased regulation in the real estate sector can slow down the market and contribute to a potential crash.
• High Mortgage Rates: High mortgage rates not only limit the number of qualified buyers in the market but also make it difficult for homeowners to refinance, resulting in distressed home sales.
• Excess Inventory: An oversupply of housing inventory, particularly in new construction, can lead to price reductions as sellers and developers compete to attract buyers.

A single negative factor is not enough to tear down the real estate market, but if you start seeing several of these market indicators come up, you should begin to prepare for a potential housing crash. If it’s already a hot market, selling now might give you a nice down payment for a less expensive house.

Personal Financial Situation

Your personal circumstances regarding financial stability are the most important factor to consider when considering selling before home values drop. Instead of focusing on exterior factors, your financial security requires careful consideration.

When evaluating whether you should stay or sell, here are some factors to consider:

• Job Security: Weathering a housing market crash has much to do with whether or not you have continued income. If you are concerned that your employer or industry will struggle in the near future, you might not feel secure in your position.
• Your Savings: A backup savings account with 6-12 months of mortgage payments reserved can be a fantastic safety net in case household income decreases or job loss occurs.
• Home Equity: A high level of home equity could give you the incentive to stay or a sizeable down payment if you sell your home. However, if you don’t have high home equity levels, a market correction could result in your net position on the home being underwater. In this situation, it may be worth selling while you still have enough equity to pay for closing costs and potentially fund a new home purchase.
• Other Debts: Your debt-to-income ratio (DTI) indicates how much free income you have. If you have a high DTA, selling before a recession might be smart. However, you can also look into other ways to lower your DTI, such as paying off credit card debt or selling a vehicle.

A recession can last as little as a few months; however, the impacts on the housing market can take a few years to reverse. Before you sell your home, look at other options that can help you save money and prepare for an economic downturn.

Future Plans

Your home may not be your forever home. Sellers who anticipate changing housing needs in the near future, such as those with a growing family or those wanting to downsize, might want to take advantage of today’s market. If you are already expecting to sell your home in the near future, your decision is really whether or not you should sell the house now or wait.

Selling now could ensure you get the best deal on your property and offset your new mortgage with a high down payment. Waiting might mean higher inventory levels, reduced demand, and loss of home equity. Your future plans could mean that you should sell now or wait for mortgage interest rates to fall.

Alternatives to Selling Before a Market Crash

Just because the housing market may drop doesn’t mean you have to sell. Some alternatives can improve your financial security and help you avoid a home sale.

Refinancing

Refinancing your home loan can help buyers get better terms and improve their financial security by withdrawing equity.

Some potential benefits of a home refinance are:

• Lowering your mortgage rate.
• Accessing home equity without paying capital gains tax.
• Paying off other debts to reduce your DTI.
• Reducing your monthly mortgage payments.

Before selling your home, talk to a mortgage broker about your options. A knowledgeable broker will walk you through the entire process and give you options that can make it more affordable to stay in your home.

To find a mortgage broker in your area, start with FastExpert. FastExpert provides an easy platform to search a vast directory of real estate agents and mortgage brokers in your area.

Renting Out the Property

Some homes may rent for more than their monthly mortgage payments. One way to hold onto your house and stay in the housing market is to downsize to a smaller rental property and lease out your home to a tenant. This will ensure someone else is paying your mortgage while you enjoy housing at a lower cost until you feel comfortable moving back home.

Home Equity Line of Credit (HELOC)

Instead of selling your home before a recession, a HELOC can provide the financial cushion you need to navigate economic challenges. A HELOC loan allows you to borrow against the equity you’ve built up in your home without refinancing or selling. HELOCs typically offer lower interest rates than other types of loans or credit cards, as your home secures the loan, so they can be a great way to reduce other costly debts.

With a HELOC, you only borrow (and pay interest on) what you need when you need it, giving you flexibility to manage your finances without taking on unnecessary debt. Some homeowners who get a HELOC never use the funds but keep them as a security blanket in case they are needed during financial hardship.

How to Sell a House Before a Recession

If you are selling your house before a recession, your goal is likely to maximize your profits. Therefore, you want to take a strategic approach that ensures you get the best possible outcome in a potentially unpredictable market.

Hire a Qualified Real Estate Agent

Choosing the right real estate agent is one of the most critical decisions you’ll make in the selling process. During uncertain economic times, working with an experienced agent who understands the market dynamics and can provide expert guidance tailored to your situation is essential. You want a real estate agent who has weathered some storms and has a marketing strategy that considers current market dynamics.

FastExpert gives you the tools you need to find a top local real estate agent. Compare agents, view track records, and find an agent you can trust to sell your home before the market crashes.

Price the House Competitively

A big mistake most homeowners make when trying to sell before a recession is overpricing. Many buyers are already wary of the purchase market. Overpricing will result in your property sitting on the market until you either negotiate with a motivated buyer or chase the market down. Chasing the market by slowly lowering your price often produces a poorer result, especially in a declining housing market.

Prepare the Home for Sale

To achieve the best possible result in your home sale, you want your house to stand out from the competition. Part of standing out is preparing your house for sale. Your real estate agent will have recommendations for changes and improvements with a high ROI, but you can also take steps to help maximize your sale results.

To ensure your home is a hot item on the market and attracts qualified buyers, here are some tips to prepare for your house sale:

• Depersonalize: Remove family photos and minimize personal items to help buyers visualize themselves in the space. Personal items can be distracting to buyers.
• Deep Clean and Declutter: Ensure your home is spotless and free of clutter, focusing on often-overlooked areas like storage spaces. Make sure you get carpets professionally cleaned, and consider refreshing rooms with a fresh coat of paint. Remove excess furniture and belongings to help spaces appear larger.
• Make Necessary Repairs: Fix any visible issues, such as leaky faucets, cracked tiles, and chipped paint, to show the home is well-maintained.
• Enhance Curb Appeal: Improve the exterior by mowing the lawn, planting flowers, cleaning the driveway, and applying fresh paint where needed. This creates a strong first impression both in person and in marketing materials.

Make the Right Move Before a Recession

Whether to sell your house before a potential recession is never a simple answer, and the consequences can have long-term financial implications. While the market might seem uncertain, taking a calculated approach can help you make the best choice for your situation. Consulting with real estate agents and financial advisors will help you understand market dynamics and your financial options.

By seeking expert advice, you can ensure that your decision is well-informed and tailored to your specific needs. Whether you’re looking to sell, refinance, or explore alternative strategies, having professionals guide you through the process can make all the difference.

Ready to take the next step? FastExpert is here to help you find top local real estate agents who can provide the insights and support you need. Start your search today and connect with an agent who can confidently help you navigate the market. Visit FastExpert now to find the right real estate agent for your situation.