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Recession coming? Take these steps to protect yourself now

Peter Warden
The Mortgage Reports editor

How likely is a recession in 2019?

Recent economic data indicate that a recession may be in the offing for 2019. How do the experts see a recession coming? The signs are there.

Verify your new rate (Apr 21st, 2019)

Signs of a recession coming

Economics is not an exact science. And those who are expecting to see a recession coming along sometime in 2019 may be wrong. But they do have mounting evidence on their side:

  1. We’re already way overdue — Forbes checked the data and the historical average period between recessions is 3.2 years. We’ve already gone more than nine years since the last one
  2. The yield curve has inverted — This just means that you get a better return lending to the U.S. government for a short period than a long one. When that’s happened in the past, it’s heralded a recession
  3. Stock markets are skittish — In November 2018, most indexes saw their entire year’s gains wiped out
  4. The “fear index” is high — In December 2018, the CBOE Volatility Index (VIX), which measures investor confidence, had been bad for the longest period in three years
  5. The trade war is piling on uncertainty — The President’s trade war may or may not turn out to be a win in the end. But it’s adding uncertainty to the economy while it’s being fought

These are not certain proofs of an imminent recession. But you may think they together raise enough red flags for you to think seriously about how you’d cope were one to hit your household in 2019.

How to protect yourself today from a recession coming soon

The first fear most of us have when faced with an economic downturn is whether we’ll keep our jobs. While some sectors are more recession-proof than others, few can be sure that they won’t have employment issues.

Some may be looking at “just” a pay cut, perhaps after a reduction in hours. But others may face a period of unemployment. How easily would you ride out either of those?

Hard to borrow

A common feature of every serious recession has been lenders refusing to lend. Too many of those making applications are in serious financial trouble and present huge risks of default.

So banks, credit card companies and others raise barriers to borrowing. In the end, only those who don’t need the money see their applications approved.

Buy your home or refinance now

So, if you’re planning on buying a home or refinancing your mortgage anytime soon, you might want to accelerate your plans. This may be your last opportunity for at least 18 months, which is the time Forbes reckons most recessions last.

What’s the first step to buying a home? [Video]

Of course, the current recovery is already three times longer than average. So you can’t count on past experiences to predict how long any 2019 recession will last. And it can take lenders a while after one ends to normalize their lending criteria.

Downsides of buying a home before a recession

You probably don’t need to worry about the first potential drawback of buying a home before a downturn. It’s true that recessions often bring lower interest rates, which means better mortgage deals may be available during such times. But that’s only of academic interest to you if you can’t borrow anyway, owing to tighter lending rules.

The second drawback may be more worrying. If a recession coming down the road turns out to be sustained, you might see a fall in home prices. However, trying to buy at the bottom of the market is a wasted effort. Because we only know when a market has bottomed out after it begins to rise.

Ideal world vs. real world

In a perfect world, you should do two things to prepare when you see a recession coming:

  1. Pay down your debts — especially high-interest ones, such as credit card balances
  2. Start or build up an emergency fund — Ideally, you want enough money to see you through at least six months without any income

If you can achieve those before the next economic downturn, you should certainly do so. But what can you do if those are impossible goals? For many, there’s simply insufficient money left at the end of each month to make such meaningful financial changes quickly, no matter what you do.

Real-world alternatives

Assuming you’re a homeowner with a decent credit score and worthwhile equity in your home, you have alternatives. Instead of paying down debts and building up your emergency fund out of your income, you can borrow.

Clearly, this is a second-best solution. Borrowing always costs you in the long run. But, if the alternative is to face the next downturn wholly unprepared, you may choose to bite the bullet.

And, of course, borrowing doesn’t prevent you from getting your household budget into better shape for a downturn in other ways. The leaner your spending, the more easily you can ride out any coming recession.

Protective borrowing

With protective borrowing, your goals remain the same. First, you want to eliminate any high-interest debt that causes a significant drain on your household budget. And second, you want an emergency fund that will see you through future rough patches.

Assuming you don’t want to go for a full-blown refinance, you have two main choices: a home equity loan (HEL) or a home equity line of credit (HELOC). Both can enable you to achieve those goals in a highly affordable way. Their interest rates are among the lowest available. And you’ll be spreading payments over many years.

Related: Best home equity loan lenders for 2019

However, both have a significant downside: they’re loans secured on your home. And if things go from bad to catastrophic, you could face foreclosure.

Home equity loan

A home equity loan allows you to borrow a lump sum and to repay it in equal installments over a fixed term.  And it usually has a fixed interest rate, so those installments really won’t change. This makes it highly predictable and budget-friendly.

If you choose one of these, you’ll need to borrow enough to consolidate any high-interest debts you have and to provide yourself with a big emergency fund. You might also want to to take enough to cover any unusual expenses that are likely to arise in the next few years: medical expenses, say, or a wedding you’ll have to pay for.

Home equity line of credit (HELOC)

A HELOC is different. You don’t borrow a lump sum. Instead, you get a line of credit, similar to the one you get with a credit card.

So you can borrow as much as you want whenever you want up to your credit limit. And you can borrow and repay and reborrow at will. Better yet, you only pay interest on your balances.

You could use one of these to consolidate your debts now and then work to reduce your balance before the recession hits. Once it does, you’ll have an emergency fund already in place.

Your stock market portfolio

The Mortgage Reports doesn’t really do stock market advice. But you might think it a good idea to review your portfolio. Now might be the time to focus on sectors that tend to do well in recessions (groceries, discount clothing, brewers …) rather than prioritize short-term yields.

Is all this advice premature? It may be. Many economists think the recession coming next is more likely to occur in 2020 than 2019. But who knows?

One thing’s for sure. You want to be ready for it, whenever it happens.

Verify your new rate (Apr 21st, 2019)