A recession is out there somewhere waiting to happen. The best time to prepare is always before it hits. One of the best forms of preparation possible is getting mobile. That may include changing your living arrangement.
As is frequently the case with articles, a topic often takes unexpected turns. In If There’s No Inflation How Come Our Insurance Premiums are Exploding? I wrote about my recent experience with significant increases in both home insurance and health insurance, and how it points to a level of inflation no one in official circles admits even exists. But in the extensive comments thread, another area of major cost concern was housing.
That detour is the inspiration for this article. This is a radical topic, but one that needs to be discussed. Several readers expressed an interest in selling their homes for a variety of reasons. Now might be an opportune time.
Why Your Living Arrangement Matters More in Recessions
The rent vs. own debate is a fairly frequent topic in the financial world, and there’s a case to be made in either direction. But I’m of the opinion a recession slants the argument in favor of renting.
While a permanent base of operations may be highly desirable during times of economic growth and stability, it can be an unwelcome anchor in an uncertain economy. We seem to be in the early stages of that type of economy, as evidenced by dramatic rises in basic living costs, like health insurance and housing. Such price spirals are often both evidence of an economy at peak and the cause for its decline.
There’s also abundant evidence of this as housing sales decline and auto sales soften, since both are big ticket bell weathers of the health of the economy. And as many are aware, the stock market is looking incredibly wobbly these days, particularly with big Friday selloffs. It seems the dominos may be lining up for a tumble.
The Job Market: The Main Support for the Housing Market
There’s some speculation the condition of housing during the Financial Meltdown was an anomaly – an example of the worst example. Many believe housing will fare much better in the next downturn.
But there’s a compelling reason why it might do even worse. Every recession is different from the one before it. In the next recession, there’s significant reason to believe unemployment will be much more dramatic than it has been in the past. Employment/unemployment has a greater affect on housing than any single factor.
Consider why unemployment may be much more acute in the next downturn:
The growth of the contingent workforce since the last recession. That group of workers – which includes freelancers, contractors, on-call workers and temp agency workers – doubled from 10.1% of the workforce in 2005 to 20% in 2017.
Such workers are typically the first to go when economic storms hit. If so, the higher number of contingency workers could cause the unemployment rate to rise much more dramatically than it did in the last recession.
Anecdotally, I’ve also noticed a common trend of people employed full time, but consistently working fewer than 40 hours. This seems to me to be a form of backdoor contingency employment.
Both show that even at a time of nominal economic growth and record low unemployment, many millions of jobs are intentionally contingent.
The explosion in health insurance premiums. 56% of the US population gets their coverage from employer plans. Those plans are no less costly than private plans. With premiums significantly higher than they were 10 years ago, this is another factor that could accelerate unemployment.
The minimum wage has increased dramatically in the past 10 years. This certainly hasn’t been the case across-the-board, but it is true in many urban states.
How Your Living Arrangement Enhances – or Limits – Your Mobility
High health insurance premiums and the higher minimum wage mean the average worker is much more costly to his or her employer today than 10 years ago. That will create the incentive to reduce staff quickly. The rise of the contingent workforce means the methodology for rapid staff reductions is already in place.
If unemployment is a bigger factor in the next recession than the last, home ownership could prove to be a serious burden. The problem is that a homeowner who is unemployed has less mobility. If relocation is necessary to pursue alternative employment, the house may prevent a move. This will be especially acute in situations where the value of the home drops below the amount of debt on the property.
A research paper, House Lock and Structural Unemployment prepared for the Federal Reserve Bank of San Francisco in 2013, reported the following:
Compared with renters, homeowners face additional financial constraints in weak housing markets that may lengthen their unemployment durations and hence overall unemployment.
The report noted the conundrum of millions of homeowners who had become underwater on their homes. That would prevent selling, without needing to come up with a substantial amount of money to close-out the sale.
As well, housing sales slow during recessions. It may not necessarily be that the value of your house drops significantly. The bigger problem is that an absence of buyers – typically due to unemployment – could make it very difficult or even impossible to sell your house at any price. This has been the case in several recessions in the past, and not just the Financial Meltdown.
The Renter’s Advantage
None of this is to imply that renters will escape a high unemployment recession unscathed. A person without a job is in trouble as an owner or renter. But as a renter, there are two distinct advantages in a time of chronic unemployment:
- The ability to move to follow a job. It’s much easier to get out of a rental situation than it is to sell a house in a bad market.
- The ability to move to less expensive quarters.
Let’s spend a minute or two on that second point, because it’s critical.
If you lose your job, and can no longer afford to pay your rent, it may be possible to move in with family or friends to reduce living costs. That may give you an opportunity to regroup, and to eventually move into in less expensive rental.
As a homeowner, you don’t have that flexibility. In fact, it’s entirely possible your housing costs will rise. That can happen as a result of counties and municipalities raising your real estate taxes to make up for declining budgets. And there also seems to be a cosmic reality that whenever you’re dealing with financial difficulties, one or more major components of your home breaks down and needs to be replaced.
The renter doesn’t have those expenses, in addition to being able to move quickly. By contrast, it could take a homeowner months or years just to unload the house, but not before facing financial devastation in the meantime.
Changes in Market Conditions May Favor Renters
Just as renters are more fluid than homeowners, so is the rental market in general. For example, even if house prices fall, sellers often need to “stick to their price” due to debt. If you owe $200,000 on a house that was worth $250,000 at market peak, and the value drops to $200,000, you can’t afford to sell at that price.
You’ll need to sell for at least enough to pay off the mortgage and cover any closing costs. You may decide you need $220,000. But if you decide you also need additional proceeds to cover the down payment on the next house, you may need something more than $220,000.
The problem is that your financial needs aren’t in sync with the then-current conditions of the housing market. This is one of the major reasons housing markets slow to a crawl during economic downturns. The large number of sellers, combined with the lack of buyers, freezes the housing market.
The situation is quite the opposite with the rental market. Unable to sell their homes, many homeowners are forced to rent them out. And as we saw in the last recession, distressed property sales are often purchased by investors, who subsequently rent them out. The end result is an increase in the number of rentals, due to the distress in the housing market.
Rents can see further downward pressure if high unemployment causes a reduction in the number of households. For example, as unemployed renters abandon their homes to move in with family and friends, the number of available apartments increases. Though they’re reluctant to do so, landlords are forced to reduce rents to attract tenants, under the ”half-a-loaf is better than none” doctrine.
The end result is that renters have more housing options, while owners have less.
My Own Housing Strategy
My wife and I sold our house before the Financial Meltdown, and have been committed renters ever since. The strategy enabled us to lower our housing costs as the economy tanked. As discussed above, the number of rentals increased as the economy deteriorated, giving us more housing options – even with kids and pets in tow.
We found we could rent houses for less than it cost to own them. In the process, we were spectators as dozens of people around us lost their homes to foreclosure.
Now before I go giving the impression that the move from owners to renters was a brilliant strategy on our part, I must disclose that it was not intentional. I worked in the mortgage business before the Financial Meltdown, and my career began crashing before the economy did.
If there was any element of brilliance at the time, it was a decision I made that we needed to lighten our load before things got really bad. But after making that decision, we found that it fit well with what would turn out to be my upcoming career transition from mortgages into blogging.
Some might call it a happy accident, but as a Bible believing Christian, I’ve experienced many of those seeming “accidents”, and have come to learn that God meets me wherever I am. I’m certain other believers have similar experiences to share. An unexpected benefit of these “accidents” is that you come to realize you’ll be OK, come what may. But it often requires thinking outside the box, rather than waiting for the flood waters to come and sweep you away.
Where We’re at Now
For the past four years we been renting a condominium, and it’s been providing us with the following benefits:
- We have no capital tied up in the property.
- We’re free to leave at any time, on just 30-days notice.
- We’re not responsible for major repairs.
- Since it’s a condo, we have no exterior maintenance, like cutting the lawn, raking and removing the leaves, shoveling snow, or cleaning the gutters.
- Due to the above, we have more time to do the things we like to do.
- We’re free to relocate – maybe even to follow our kids, if that situation develops.
- If the economy gets bad, we can move to a less expensive space, or even to take advantage of lower prices due to a weakening housing/rental market.
- We’re “keeping our powder dry” to potentially buy a house later at distressed price levels.
The Downsides of Renting
In the interest of full disclosure, it’s not an entirely perfect arrangement. First, living in a condo, we have a homeowner’s association. Regular readers know my feelings on those organizations. However, they’re less threatening when you’re a renter than when you’re an owner. We’re also limited to no more than two cars, though we’ve been making that situation work to our financial benefit.
The other major issue is the rent isn’t cheap. Like house prices, rents tend to rise in a strong economy. But we’re willing to accept both limitations in favor of greater flexibility and mobility.
Still another potential issue is that we haven’t had the benefit of the rise in property values that homeowners have had in the past few years. But that’s only a benefit if you plan to sell the house and reap the gains by exiting the housing market completely.
But we’re aware that’s not what most homeowners do. They stay in the house, and cheer on the rising equity, without giving much thought to the reality that said equity is in fact dead equity. It’s what causes property taxes and homeowner’s insurance to rise, and often temps owners to increase indebtedness by borrowing out the equity.
And perhaps just as important, many people die in their houses, without ever reaping the benefits of the higher value.
In my own life, I’ve come to realize that there are many things that are more valuable than money. Keeping your options open is just one, but a big one at that.
Final Thoughts on Getting Mobile Before the Next Recession Hits
I realize that to a lot of homeowners, would-be home owners, and anyone engaged in the housing industry, my position is a heresy. But at the same time, I think it’s critical to stimulate thinking in different directions. That can become a lifesaver when the economy deteriorates. And I think many of us have a sense that a downturn isn’t far off. There are even serious questions if we’ve ever actually fully recovered from the last meltdown.
Whenever crisis looms, the best time to take action is before it happens. No, I don’t claim to have a crystal ball on when this will play out. But I’ve lived long enough to know that it will, despite the abundance of experts who claim otherwise.
That said, getting mobile before the next recession hits shouldn’t be limited to transitioning from homeowner to renter – if in fact that makes sense in your case. It may not, but rest assured if you’re struggling keep your home now, it will become even more difficult when the economy gets worse.
Other strategies that make abundant sense are to build up your savings, and pay down or pay off any debt you have. That will increase your liquidity, and like being a renter, liquidity is a way to keep your options open.
None of us know or can know how the next economic crisis will play out. But if there’s one realization we should all take from both the Financial Meltdown and the Dot-com bust, it’s to be ready for whatever happens.
Now is the time to make those preparations and changes, while there’s still time and breathing room.