Real Estate

Published: Sep 09, 2022 | Updated at: Sep 09, 2022

This past year, inflation has skyrocketed by 8.5% — the highest in 40 years.

Combine that with soaring housing prices, an inevitable real estate downturn, and a possible housing bubble expected to burst in the coming years — it's not crazy to think that a recession is on the horizon. 

Anyone that has suffered through a recession in the past knows how painful it can be. The good news is that there are several things you can do to prepare for it. In this article, we'll cover how to prepare for a housing market crash to keep you and your loved ones safe in the coming years.

Keep reading to learn more.

What is Considered a Recession?

An economic recession occurs when the economy declines over at least two quarters. However, it can go on for several months or even years.

During this period, the gross domestic product (GDP) drops. This causes dramatic changes in the prices of important commodities like gas and oil. Consumers will begin to see higher inflation and more unemployment. Because consumer confidence suffers, people spend less than they normally do. 

Investments like real estate and stocks tend to lose value, which in turn affects savings and retirement accounts. Even lenders raise their lending requirements, which makes it much more difficult for people to borrow money.

How to Prepare For a Recession 

In 2008, there was a significant recession due to the collapse of the housing market. Many believe that the current housing market is headed in the same direction. Let's take a look at a few ways how to prepare for a housing crash. 

Take Stock of Your Financial Health and Priorities

When a recession comes, one of the worst parts about it is not knowing what is coming next or when things will finally improve. It's important to take stock of exactly where you stand when it comes to your finances.

You can ask yourself a few questions:

  • How much cash do I have right now?
  • If I needed cash, how could I get it?
  • How much debt do I have?
  • What are my basic monthly living expenses? 
  • Do I have any major life events coming up?

Understand how much you typically spend today and try to anticipate what you'll need over the next six months to a year. As a rule of thumb, it's good to have at least six months of living expenses for an emergency.

Stay organized and clear about your finances so you can be prepared to make changes.

Update Your Financial Plan

It's important to update your investment strategy to suit when you'll need the money. For example, if you're close to retirement, you need to make sure you aren't exposed to any risk. 

If you need to make any changes (from high-risk to low-risk), do them accordingly. For example, you can change a portfolio that's composed of stocks to one that is composed of bonds. 

Review Your Budget and Make Cutbacks

Always make sure you're living within your means. This isn't just good advice for when a recession is coming, it's something you should live by daily.

Take into account what you're spending and separate what are necessities and what aren't. Things that might fall under necessities include:

  • Housing/rent
  • Food
  • Gas
  • Insurance

After you separate these, eliminate discretionary spending like dining, shopping, and other things that aren't necessary. 

Pay Off Any High-Interest Debt You Have

If you have any high-interest debts weighing you down, it's time to prioritize paying those off first. This can include things such as personal loans or credit card balances. 

When recessions happen, federal interest rates are usually significantly increased, which means your debt becomes a lot heavier. Focus on getting rid of those debts before anything else.

Increase Your "Rainy Day" Fund

Start increasing the amount you're saving for emergencies. When recessions happen, there is typically a lot more unemployment. Although no one wants to imagine that they'd lose their job, it's important to prepare for the worst. 

Try to have at least six months of living expenses saved up. However, it's important to note that this emergency fund should not be invested. You don't want to be put into a situation where you have to sell off stocks at a loss. Make sure your funds are liquid and kept in a high-interest savings account.

Look for Other Sources of Income

Try to find other ways to make some money when the economy is still prospering. There are several options to do this depending on your situation. You can:

  • Ask for a raise
  • Pick up extra shifts at work
  • Pick up a side gig
  • Start doing some freelance work

Another good idea is to update your resume and continue building your network. This can help position you to jump off the line quickly if you're searching for new work during hard times.

Keep Investing Calmly and Intelligently

The first reaction that many people might have during an economic downturn is to panic and jump ship of their investment plans. Like every other recession that has ever happened — it will eventually pass.

The main goal is to survive the recession financially. After that, you'll be happy you didn't get rid of your investments.

Some investments might actually benefit from a recession. For example, if you have money going into a 401(k), that cash is going into the market at lower prices, meaning you're getting greater value.

Stick with the plan that you had and make necessary adjustments, but don't panic!

Be Prepared For the Next Housing Market Crash

That's a good start for preparing for a housing market crash or economic recession. The most important thing to remember is to plan ahead, save for a rainy day, and not panic with your current investments.

Businesses need to stay prepared for a possible downturn in the market as well. Staying organized and productive is key to continuing to prosper during hard times.

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