Jaspreet Singh: A Housing Market Recession Is Coming — What This Means for Homebuyers

Jaspreet Singh
Jaspreet Singh / Jaspreet Singh

To combat recently rising inflation, the Federal Reserve Bank (the Fed) has been increasingly raising interest rates. This also has had a direct impact on increasing mortgage rates. This and other economic factors have left the fate of the housing market in flux, according to financial expert Jaspreet Singh, an entrepreneur, licensed attorney and founder of The Minority Mindset YouTube channel.

Singh shared with his viewers that Wells Fargo bank issued a warning suggesting that today’s housing market may be heading toward a 1980s-style recession. They aren’t the first bank to say so — Singh reported that Bank of America also warned in October that turbulence is likely coming to the housing market.

To understand what this means for buyers and sellers today, Singh explained what happened in the 1980s housing market recession.

What Drove the Housing Recession of the 1980s?

Singh explained that in order to understand the housing recession of the 1980s, thus potentially our current situation, you first need to understand that the mid- to late-1970s was a tough economic period for the U.S. due to extremely high inflation, a slowing economy and a higher unemployment rate — circumstances known as “stagflation.” This had to do, in part, with oil issues, and the dollar being severed from the gold standard, allowing more paper money to be printed, which drives inflation.

Around the end of the 1970s, homebuyers were paying around 7% for a 30-year fixed loan. But by 1980, in order to cool inflation, the Fed had to jack up interest rates to 13%. This number shot up to a staggering 17% by 1982. Naturally, such an exorbitant interest rate cooled the demand in the housing market. Few buyers wanted to pay that much for a mortgage.

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On the other hand, with so few buyers in the market, it did put buyers in the position of having more negotiating power. Singh said that some buyers were able to negotiate as much as 10% off the asking price of houses.

Are We Headed Toward a Similar Housing Recession?

The advice of 1980 suggested that sellers should hold off trying to sell until rates fell, when pent-up demand would drive prices back up, Singh recounted. Except it ended up taking until 1985 for those rates to actually fall, and then only to 13%. It wasn’t until 1990 that they dropped to 10%. Thus, Singh said experts can’t always predict where mortgage rates will go, even big banks like Wells Fargo and Bank of America. Singh’s recommendation is not to take any bank or financial expert’s word for a rate shift in the housing market but to do your own analysis. 

Don’t Take Anyone’s Word for It

That said, there are some alarming similarities between then and now to consider: Mortgage rates are at 8% now, inflation is high and housing affordability is rising faster than wages can compensate. Yet, the fact is, nobody really knows when the Fed will drop those prices, Singh explained.

Organizations with skin in the game are getting more desperate, such as the Mortgage Bankers’ Association, the National Association of Realtors and the National Association of Home Builders — they issued a joint statement to the Fed begging them to stop raising rates and consider cutting them soon because it’s hurting their commissions.

Yet the Fed appears to be set on keeping interest rates high to fight inflation a while longer.

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What Does It Mean for You?

So how does this history help you understand what’s happening now? Singh said that the higher interest rates and cooling demand could put you in the position of having more leverage to negotiate on housing prices. In other words, buyers may have the upper hand. 

Buy Now, but Refinance Later

If you’re in a position to buy now, and can take advantage of that buyer’s advantage to negotiate a lower price, you can always refinance to a lower rate when the interest rates drop, and save yourself money in the long run.

Consider a Larger Down Payment

Another possibility to take advantage of a housing market recession is to make a larger down payment — sometimes this can negotiate you a slightly lower interest rate. It can also ensure you don’t have to pay private mortgage insurance (PMI) on top of the higher mortgage interest rate.

Invest In Your Existing House

You could also take this time to invest either financially or through small, DIY renovations into your existing home, whether to make it more livable or to potentially make it more sellable when the time comes.

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