9 Ways to Prepare for a Possible Recession

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The past couple of years have been, well, dizzying, and now with inflation raging and interest hikes abounding, everyone wants to know: Are we headed into a recession?

The answer is, unfortunately, maybe. That’s enough to make us all a bit queasy, and homeowners are feeling especially nervous. Will your equity plummet? Should sellers hurry up and sell now? Should buyers jump in ASAP, or cool it until things look more stable?

To get the answers, we spoke with Andretta Robinson, a top real estate agent with over 16 years of experience and 15 awards in bringing stellar property transactions to fruition. Robinson gets into the nitty gritty below.

And to get the full story on how you can recession-proof your finances, we interviewed Joseph Sroka, chief investment officer and co-founder of Atlanta-based investment firm NovaPoint Capital. Sroka brings over 20 years of experience in financial advising to the table.

Read on for an expert-backed guide to how to prepare for a recession — before one comes.

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What is considered a recession?

So, what exactly is a recession? It depends on who you ask. The most popular definition of recession is a bit technical:

If it’s been a while since economics class, fret not. GDP is the net cash value of everything that comes out of an economy. It’s typically measured in quarters, which are periods of three months each. In other words, the technical definition of a recession is an economic downturn that lasts at least six months.

The National Bureau of Economic Research (NBER) is responsible for deciding on what officially counts as a recession and recording the start and end dates. Here’s their definition:

Are we going into a recession?

Things are looking a bit iffy. GDP has been negative for two consecutive quarters as of July 2022, and the current state of inflation paired with Fed interest hikes could signal pain to come.

But as it stands now, unemployment is still low, which is a key metric for determining how healthy the economy is. If we are entering a recession, this could be a sign that it won’t be widespread and deep.

“I don’t see this being catastrophic, as long as the job market remains healthy and consumers remain able to meet their needs, even if they’re tightening their belts,” Sroka says.

Robinson tells her clients something similar: This isn’t a 2008 situation.

“In the 2008 recession, there was very little equity in homes,” Robinson explains, referencing the previous housing recession — a market crash brought on by risky lending and mass foreclosure.

The difference now? Everything. “Most sellers have tons of equity in their property, which is wonderful for homeowners,” Robinson explains. “They’re able to sell their property and make a profit, as opposed to having their property go into foreclosure.”

All that is to say that future market conditions aren’t set in stone, but there’s no need to panic. Instead, take a look at your financial situation and prioritize building stability.

9 ways to prepare for a recession

Building up financial stability and developing a long-term plan is key to surviving volatile market conditions. “These things aren’t really any different than the things you should be doing every day,” Sroka says, “Whether this recession comes or not.”

Here are nine key ways to prepare your finances for a recession:

1. Assess your financial health

Recessions can be damaging to people who are financially overextended or who have their money tied up in risky assets. In the words of Warren Buffet, “Only when the tide goes out do you discover who’s been swimming naked.”

“Of course, you’re not worried about financial damage from being overextended during a positive economy, because borrowing is benefiting you,” Sroka explains. But flying too close to the sun is always risky.

In particular, Sroka mentions holding too many properties with low equity as a risk. “Any recession can be catastrophic for someone who, for example, owns five rentals that are all 90% mortgaged.”

2. Update your financial plan

Always tailor your investment strategy to when you’ll need the investment money. If you’re nearing retirement, take special care to revisit your investments and ensure you’re not exposing yourself to too much risk, and instead are preserving wealth.

“When you’re very young, you can be aggressive in your investing,” Sroka says. “As you age, you should gradually get more conservative, going from high-growth assets to income-providing assets.”

That may mean trading a portfolio composed mostly of stocks for one composed of bonds, for instance. “If you’ve been doing that all along, then keep on that path,” Sroka says. “Because that course is mapped to take into account the occasional recession.”

3. Review your budget

First thing’s first: Ensure you’re living within your budget. Even if recession isn’t approaching, it’s indispensable advice.

“Make sure that you revisit your household budget to make sure your needs are being accounted for,” Sroka says. He mentions housing, food, and fuel: things you can’t live without. “If necessary, eliminate some discretionary wants in your life.”

4. Cut back further

Revisit your budget to see how much of your income goes toward expenses, how much goes toward discretionary spending — that’s shopping, dining, or any other spending you do that isn’t necessary — and how much you’re putting into savings each month.

“If you want to sleep well at night and ensure you’ll be able to keep a roof over your head and meet your needs, now’s the time to start living within your means,” Sroka says. Spending less than you earn and saving the difference is key to increasing financial resilience, recession or not.

“Your money is there to benefit your life,” he says. “And the way you can make sure your money will always be there to benefit your life later is by adjusting your lifestyle now.”

5. Pay off high-interest debt

If you’re carrying high-interest debt, such as a credit card balance or a personal loan, prioritize aggressively paying it down (without overextending your budget overall).

Given that recessions are often linked with increased federal interest rates, you should focus on erasing your highest-interest debts first. Those debts can become more expensive if they’re variable rate, such as is the case with a credit card or a home equity line of credit (HELOC).

6. Increase your emergency ‘rainy day’ fund

Increased unemployment often accompanies economic recession. In case your income were to be cut off or reduced, start buffering your emergency savings now.

“Aim for six months of living expenses saved up,” Sroka says. He says that’s enough for most people to sleep easier through volatile market conditions.

Make sure the money isn’t invested. That can be a big mistake in a recession, when selling stocks at a market low means taking a loss — at a time when you can’t afford to be hurt. So keep your funds liquid in an interest-bearing savings account.

7. Look for additional sources of income

Unemployment rates are still low, so consider making hay while the sun shines.

This can mean asking for a raise or picking up extra shifts at work. For even greater resilience, aim for diverse streams of income. Can you pick up a side gig? Do some freelance work?

In addition, consider updating your resume and building your professional network now. Unemployment rates are low. If we do enter a recession, however, jobs could become harder to come by. So position yourself as a competitive candidate to stay agile in case things get dicey down the line.

8. Keep calm and carry on investing

For those who have quite a bit of time between them and retirement, economic recession may have some long-term financial benefits. “If that money’s coming out of your paycheck and into a 401(k), then you should actually love a market downturn,” Sroka says. “Because it means some of that 401(k) money you’re investing is going into the market at lower prices.”

The last thing you want to do is jump ship in a state of anxiety. Instead, stick with the plan. Should it come, this recession, too, shall pass. “As long as you can survive financially, you’ll look back five or ten years from now and be happy with your investments.”

9. Consider getting professional guidance

Sroka explains that investment advisors are prepared to help their clients pick investments that are tailored to their risk tolerance.

“Whether you work with a professional or not, it’s vital to have your investments aligned with the right level of risk for you,” he urges. “Remember, everyone’s risk-loving when the market’s going up; everyone’s risk-averse when the market’s going down. Try to find a happy medium: a risk-tolerance that you can live with every day.”

What might a recession mean to home sellers?

If recession is looming, should you sell your home now? Or wait it out?

“The beautiful thing about real estate is that real estate is personal,” Robinson says. “When a seller is ready to sell, it’s often because their lifestyle has changed and they feel ready. So they’re often determined to sell regardless.”

That said, she also sees the current economic uncertainty as having an impact on inventory. “A lot of sellers have heard they need to hurry up and sell before the recession,” she explains. “So, we’re getting flooded with inventory, and prices are dropping.”

That sounds scary, but Robinson says it’s much more like a market correction or stabilizing than a decline. Seller profits may not be as “astronomical” as they have been, but it comes down to how inflated home prices have become in your local market.

“California, Florida, and Texas, they’re going to have a bigger drop,” Robinson suggests. “Whereas in markets like Chicago, we never got that inflated, so we won’t see such major declines.”

Consider using HomeLight’s Simple Home Sale Calculator for an idea of how much you can expect to earn in home sale profits — before you make plans to sell.

What might a recession mean to homebuyers?

A real estate agent’s advice to buyers now? Don’t wait.

“Jump in now,” Robinson says. “We all know the interest rates go up and down, up and down. Here’s my model for buyers: Marry the house, date the rate.” That means buy the home you love now, at the current interest rate. Then, you can refinance down the line if rates decrease.

For now, focus on the opportunity to finally put in a winning offer. “Inventory is nice right now,” Robinson says, and buyers who have previously been beaten down by the competition should take notice. “Many opted out of those bidding wars because they simply got tired.”

Now’s your chance to get back in the game — without having to waive contingencies just for a shot at closing. Before you jump in, get clear on just how much home you can afford with our Home Affordability Calculator.

What might a recession mean to homeowners in general?

The first thing for homeowners to consider is how they can continue building their financial stability through the recession. That comes down to preserving and building equity.

“Most likely, the only thing that would happen to them is that their equity may be reduced, but not wiped out,” Robinson says.

This is the time to focus on building equity. Robinson’s recipe for success? “Love the house while you’re in it, list it when you’re ready.” Increasing your home’s value not only increases the worth of your assets, which is a strong piece of your overall wealth, but it also means you can command a higher price when you sell.

Focus on high-ROI renovations that add lots of value while increasing the pleasurability of living in your home.

How long do recessions typically last?

No recession is exactly the same as another one, so it’s hard to pinpoint precisely how long a recession typically lasts. Compared to periods of economic expansion, recessions are relatively brief.

Since World War II, recessions have lasted about 10 months each, according to NBER data. But the lengths vary greatly, and comparing one recession to another isn’t always apples to apples.

For example, the 2020 recession which started due to the pandemic saw a tremendous spike in unemployment, but it lasted only a couple of months. In contrast, the Great Recession that came before it lasted 18 months.

This downturn too shall pass

While recessions come and go, one thing remains constant: Being intentional and prudent about managing is always key to building stability. It may also be wise to speak to a financial advisor to ensure you’re prepared to weather a market downturn without losing any skin.

When it comes to buying or selling a home, the key to success remains constant, whether markets are red hot or icy cold: Work with an experienced real estate agent.

“The top mistake that homebuyers and sellers alike make in a recession is not working with an experienced real estate agent,” Robinson says. “Not all are alike, and an inexperienced agent leads to a frustrated buyer or seller.”

Whether you are buying or selling, HomeLight’s free Agent Match platform can connect you with top-performing agents in your area.

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