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10 Ways Recessions Impact Real Estate (& How to Dodge the Worst of It)

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Given the recent stock market volatility, many real estate investors wonder, "Are we headed into a recession? How will that affect real estate? And how long is Brandon going to stay committed to that beard?"

The beard is a puzzle that’s baffled scientists for years—but when predicting how the next recession will affect your portfolio, history can be a guide.

Is Real Estate Recession-Proof?

This is a common misconception. Unfortunately, it’s not.

Many silly real estate investors who believed that myth got wiped out during the last recession. But the good news is that real estate can be recession-resistant. With proper precautions and an understanding of recession dynamics, you can prepare your portfolio to navigate choppy economic waters.

I had the great privilege of going through the horrific, Armageddon-like real estate collapse of 2008 with multiple properties. It was like a Michael Bay movie—people screaming in the streets, explosions, cars flipping over…

OK, not exactly. But it could’ve been if they’d have let him direct “The Big Short.”

I had six multifamily properties at the time.

Below I’ll walk you through the economic cause-and-effect patterns that impact rents, values, and the ability to maneuver (sell/refinance) during recessions.

The Pre-2008, 2008, and Post-2008 Investing Climates

It all started pleasantly enough…

I discovered real estate investing in 2000 and loved it. Everyone did. You couldn’t lose. That went on for seven years. Then, 2008 happened.

Lehman Brothers and Bear Stearns, two of the world’s largest investment banks, collapsed. The stock market plunged, and the financial world went into panic mode

Sound kinda familiar?

These events then unleashed an economic chain-reaction. Below are several of the ways real estate was impacted.

  1. Real Estate Investment Activity Ground to a Halt

Shell-shocked investors watched with fear, uncertain how long the economic slide would last. Values were at record highs prior to the crash, and many felt this was a long-time coming. The sense was that things could get a lot worse before they got better.

When investment stopped…

  1. Construction Ground to a Halt

New construction projects, and many already in the pipeline, were put on hold. Investment dollars dried up, because the investors providing those dollars were reeling from their own losses. And confidence that new projects would get completed and be profitable was in doubt.

One thing was certain: The boom clearly over.

Ten million workers are employed by the construction industry. Many are project-based, not salary-based. So when the construction activity stops, a chunk of the labor pool becomes unemployed overnight.

Many other industries are impacted by the health of the construction sector.

Also… in boom years, there’s a tendency to overbuild.

Related: Recession Watch: Are We Overbuilding in the U.S.?

You’d think that building would be based on need. But when the spigot of construction financing flows enthusiastically, no one’s there to monitor how much gets built and turn off the spigot.

The result is oversupply.

There’s a saying that goes, “Boom markets die from oversupply.” Another one goes, “Cranes in the air, investors beware.”

For some reason, there are a lot of cute rhymes about overbuilding. I think Dr. Seuss may have moonlit as a construction economist.

  1. Banks Became More Conservative

The recession began with a spike in delinquencies and defaults, which turned into a tidal wave of foreclosures. Lenders who'd made risky loans started going bankrupt, culminating with the world's largest lender at the time: Countrywide.

Foreclosure Sold For Sale Real Estate Sign in Front of House.

So, banks reacted by becoming more conservative, making it difficult for struggling property owners to refinance. And purchase loans were given much more scrutiny.

This conservative lending added to the market slowdown.


  1. Renters’ Incomes Went Down

The stock market plunge and growing layoffs caused consumer confidence to drop. People were cautious and spent less. This caused corporate profits to go down, resulting in salary cuts and layoffs.

We were seeing a steady uptick in unemployment.

Many of those laid off were renters, who then struggled to pay rent. Many others were homeowners, struggling to pay mortgages. (I won’t go into the compounding effect of adjustable-rate mortgages, because it was specific to 2008. The intent here is to highlight general recession patterns.)

Related: 5 Tips to Survive a Coronavirus-Induced Recession (& Thrive Afterward)

  1. Renters Sought Cheaper Alternatives

Renters in high-priced, A-class apartments moved down to more affordable B-class units. Others moved in with friends, or back home with their parents. There was a “renter consolidation” that caused…

  1. An Uptick in Vacancy

It was most pronounced in A-class properties, but it was felt at all tiers and exacerbated by the overbuilding of recent years. Much new construction tends to be A-class, because it’s the most profitable.

However, apartment vacancies were mitigated, because a new pool of tenants was entering the market…

  1. Former Homeowners Became Renters

Job cuts caused many struggling homeowners to fall behind on their mortgages. Here’s yet another downer saying, “Recessions create renters.”

Not as catchy. It doesn’t even rhyme.

Man search apartments and houses online with mobile device. Holiday home rental or real estate website or application. Imaginary internet marketplace for vacation lodging or finding new home.

This brought some stability to multifamily occupancy levels.

But due to the confluence of factors—oversupply, lower incomes, investor fear, and tightened lending…

  1. Property Values Declined

Single-family residences were hit the hardest. There were far more sellers than buyers.

Also, SFR values are based on buyer sentiment (or “emotional buyers”). The emotion had been irrational exuberance during the preceding years, but now it was fear.

Multifamily values were more stable, due to their income stream supported by leases. But that didn’t mean multifamily properties were in the clear.

Rent growth stalled, transitioning into rent declines in some locations hard-hit by the recession.

Additionally, unit class mattered. Rent drops were most precipitous in A-class, as many tenants could no longer justify paying top-of-the-market rents for luxury units. Many A-class renters relocated to B-class properties.

Meanwhile, to address the turmoil…

  1. The Fed Stepped in and Lowered Interest Rates

It was an attempt to stimulate the economy, and it provided a lifeline for many property owners in trouble.

Owners who were not in trouble (aka were prepared for the recession) had an opportunity to refinance at rock-bottom rates, improve the health of their portfolio, and navigate out of the storm.

But the lenders were still reeling from their losses. And as values went down, they were enforcing the "maximum loan-to-value" clause—a clause often forgotten in normal times because loan balances go down and property values go up.

But during recessions, when property values slide, borrowers who had been at max leverage (often 75 percent LTV) find themselves having to pay down their loan to meet the required LTV.

What does this mean?

Basically, if you bought a property for $1,000,000, and the lender’s max LTV (leverage-to-value) is 75 percent, they will give you a $750,000 loan. But if for any reason your property value drops to, say, $900,000, your $750,000 loan has now increased to 83 percent of value. So, the lender will require you to pay down the loan to get to 75 percent LTV.

$900,000 x .75% = $675,000

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Therefore, you’d be on the hook to fork over another $75,000.

This happened to me.

I had to pay down a loan by $95,000 to meet the LTV requirement. The upside, however, was that due to the Fed's rate cut, my interest rate went from 4.5 percent to 3.5 percent, and my loan balance was now lower—resulting in a big boost to cash flow.

And luckily, I had the reserves to make that $95,000 payment!


  1. Where You Invested Mattered

Each market experienced the recession differently. The severity and recovery timeline varied depending on where you were. Markets with diverse economies were the most resilient.

Chicago downtown skyline at twilight with highway and traffic.

Prices recovered sooner in major markets, as cautious investors sought the safety of top-tier markets.

Those top-tier markets then became the first where prices became overheated as the economy recovered, so investors moved on, seeking returns in secondary and tertiary markets.

And the whole cycle began again…

Key Takeaways from the Last Recession

  • Don’t over-leverage. Especially late in a boom market.
  • Be prepared for rent volatility. Many investors don’t realize rents can go down. But they do!
  • Have reserves, and bolster your cash positions (no-brainer).
  • Monitor the supply of new units being built in your market. (I make a point to invest in cities where it’s very hard to build.)
  • Buying value-add helps—you can offset declining values through forced appreciation.
  • Avoid A-class properties, or bolster those reserves. (I’m not anti-A-class, but I prefer to buy these premium assets coming out of a recession, when they’re beaten up and bargain-priced.)
  • B & C-class multifamily is most stable (but not immune). This was my experience, and statistics seem to support it.

Rent Declines 2008-2010 and Rent Growth 2010-2018

Rent Growth by Asset Class 2008-2018

I’m fortunate that all of my multifamily properties survived the 2008 recession. And yours can, too—just prepare!

I hope this was helpful and good luck!

Recession-Proof Real Estate book blog ad

Were you investing when the Great Recession hit? What was the impact on your portfolio? What did you learn?

Share in the comment section below.

Mark is a real estate investor and syndicator in Los Angeles. He bought his first duplex in 2000 as a hedge against the uncertainties of an entertainment career. After 18 years, he’s grown his RE...
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    Barry H. Investor from Scottsdale, AZ
    Replied 6 months ago
    MARK - This is a great article and I started in residential RE investing in 2004 myself (AZ), rode the wave up and then found myself shell-shocked. I did have to cut rental rates a bit in 2008-2011, but made it through !! I found your comments RE Class B/C being more protected and I completely agree. I have never owned Class A and now that I do Turn Key Tenant-Occupied sales of completely remodeled homes in Kansas City MO (B/C), I am actually getting flooded with investors calling to buy because the ROI exceeds 20% annually. Because I seller-finance, it offers many options for me as the Seller and also the Buyer, depending on their risk profile. Thanks for summarizing these critical points for these critical times.
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Hey Barry, thanks for your comment -- glad you survived!
    Tiffany Johnson Investor from Olympia, Washington
    Replied 6 months ago
    I appreciate hearing from someone who went through the last real estate market crash, and can have a sense of humor about it. I started investing in 2010, so I've only known the good times. Thanks for putting things in perspective.
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Thanks, Tiffany! Wow, you you got in at just the right time. We've had a great run. Looks like we may now be in for some turbulence, but that'll create opportunities for those who are careful and can navigate it. Good luck with your portfolio!
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 6 months ago
    the Great Recession which was the second depression in US history was caused fraud and errors at all levels in the mortgage and housing industry. in all other recessions real estate declined as a symptom of the recession. in a recession real estate decline may not be that bad. However, the probability does not go away because the income and wealth inequality has been increasing since 1968 with income and wealth for the lower middle class and below adjusted for inflation is stagnant. each recession and natural disaster widens the gap. they are less likely to be able to weather the recession or disaster. most FEMA aid favors those with homes and disfavors renters who are less likely to have savings. add to the mix the US has had a housing shortage since the early 2000s from increasing construction costs and lack of change in zoning for density. all of that creates class of people for which owing a home will never be attainable in high tech cities with astronomical home prices. those cities seem to experience more boom bust which i believe will be worse with each next recession.
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Thanks, Michael, all good points.
    Miranda Paton
    Replied 6 months ago
    I appreciate the lessons of the 2008 recession nicely listed out for us. And I think some of the prudent hedges you suggest-- not being over-leveraged/holding some cash back, choosing B or C properties-- are great in any bear market. But! There is a difference between a recession that starts in real estate with mortgage debt and housing prices being the source of the problem, and a case like today's downturn where the problem originates elsewhere. I'm a big fan of the B and C, "workforce housing" properties and I appreciate the long-range point of view that Mark spelled out for us in his comment. What is recession-proof is real estate that people need rather than a property that they merely want.
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Thanks, Miranda, that's a great point -- 2008 had a different trigger -- mortgage defaults, which spread to the rest of the economy. This time around, it's a virus, initially disrupting the Chinese supply chain, then shutting down the entire economy. Both occurred after a long run-up, when asset prices were at all-time highs. My guess is the broad impacts will be similar -- negative GDP growth, a spike in unemployment, jittery lenders, softening values, and -- like you say -- renters sticking with units they need (and can afford) versus those they merely want.
    Lee Ripma Rental Property Investor from Los Angeles, CA
    Replied 6 months ago
    Great article Mark! I remember the last crash but I was just coming out of college and wasn't investing yet at the time. I rationally know that RE markets are cyclical and I've seen the graphics where unemployment cycles up and down over 5-10 year periods. Now that I'm actually investing I'm seeing it first hand - the buyers full of fear just waiting. Banks not lending. Incomes lots due to the virus. It'll be really interesting to see what happens when the virus threat is gone and we're actually all able to go back out to restaurants and fly again. How long will the economic depression last? Will it be 3 months or 3 years? No one knows but we can all be prepared since we knew this was coming at some point. This one is interesting because folks are losing their jobs and can't pay rent. Cities are banning eviction. I think a ton of pain will be felt in the commercial sector - the owners who lease to store owners, restaurants, and office.
    Kay Martin from Killeen, Texas
    Replied 6 months ago
    Lee, I appreciate your insights. We've had rentals for 10 years and never experienced anything like this. One of our rent houses has a HUD tenant. Initially, we were a bit disgruntled by the way HUD handles contracts with new tenants. First, HUD asked us to reduce the initial rent by $100+ per month; then HUD asked us to make changes like putting peep holes on the garage door and back door (at our expense). It took much longer than expected to get the HUD lease/contract approved and monthly payments started. We were unable to see the merit of working with HUD...until now, In cases of a quick economy turn-a-round, we see the benefit of HUD tenants. That's at least one of our properties where the rent will probably continue to get paid, whether the tenant loses her job or not. YEA HUD!!!
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Thanks, Lee! Yeah, this will be interesting. Usually it's a vulnerable sector of the economy that triggers a downturn, but this time a virus forced an otherwise healthy economy to completely grind to a halt -- in a matter of weeks. Crazy! Seems like the shutdown may be short-lived (hopefully), but the daily economic loss of is staggering (business hasn't just slowed, it's stopped entirely). ...And yeah, the eviction ban is new (but I get it). I'm glad the gov't is addressing the other 2 dominos in that row-- owner mortgage payments, and lender solvency. Seems like it will ultimately get solved with the printing of maybe $4-5 trillion new dollars that will stabilize the economy, but dilute the overall value of the dollar. This new tactic of quantitative easting seems to make owning hard, appreciating assets (like real estate) more important than ever.
    Kay Martin from Killeen, Texas
    Replied 6 months ago
    Hi Mark, I was not aware the government is working on assistance for landlord mortgage payments. Can you tell us more about the mortgage assistance plan? Thanks!
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Hi Kay, on 3/18, Fannie Mae, Freddie Mac and HUD announced a suspension of foreclosures for an initial term of 60 days. The recently-passed $2 trillion stimulus bill also included a clause that suspends foreclosures on commercial loans for 60-days, and prevents charging late fees or interest. But it's unclear if that mandate currently applies to private lenders. I know that all private lenders are preparing for this, personally, some of my lenders are offering 90-day suspension of payment, which gets added to the balance of the loan. Here is the initial article I read, hope this helps!:
    Glenn F. Rental Property Investor from Virginia Beach, VA
    Replied 6 months ago
    Regarding #9 and the "maximum loan-to-value" clause, this highlights one of the strengths of SFR investing with traditional fixed rate mortgages. The house value can fluctuate and the mortgage payment will be the same month after month. Real estate is ALWAYS cyclical so you to ride out the lows easily without having to pay to keep the LTV in check.
    Tom Roffers from Minneapolis, Minnesota
    Replied 6 months ago
    Thanks for this info Glenn - I was wondering about that. To clarify, this is applicable to SFR only... not small multi-family still not considered "commercial"? (duplex, tri, quad)? Thanks.
    Colin March Rental Property Investor from Portland, ME
    Replied 6 months ago
    Good article for anyone to read who didn't live through (or hasn't studied) the last recession. LTV maintenance covenants are a very big issues so if you don't know if you have agreed to them, go find out. If you have them, hopefully your bank is strong and won't force you to pay down the loan in a downturn. Whenever possible, borrow from a bank that does not require one. This should be on your list of lessons learned from the last recession.
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Good advice, Colin, thanks!
    Kay Martin from Killeen, Texas
    Replied 6 months ago
    Thanks Colin. I will investigate if we have a LTV maintenance covenant with the bank. All of your feedback has been very educational for me. Appreciate it.
    Kay Martin from Killeen, Texas
    Replied 6 months ago
    I hope Bigger Pockets posts more of these types of articles as we jointly cope with COVID-19. This is great info for someone who did not live the the 2008 downturn. I contacted my Broker this morning and asked if we could refinance 2 of our properties at lower interest rates, since the fed dropped rates. She informed me that all banks have not yet dropped rates to meet the fed rate. She said Money is getting tight and some banks are doing buybacks. She even mentioned that some lenders and industry workers will no loner be in the market when this is over. This volatility will likely impact Realtors/ brokers/ bankers.
    Paul Kist
    Replied 6 months ago
    Oh my, this topic brings back lots of memories. I bought my first rental home in 1963 (after graduation in 1962) looking for fast appreciation but the economy was flat. I had beginner's luck and sold it at break even. Later, I saw a burned out house In 1966 which the lender was desperate to get off his books. He gave me the fire insurance money and a loan to rehab the place. I made a year's income off that fix and flip which funded my beginning RE investment career. I bought, rehabbed, and sold several dozen single family houses all around Los Angeles. At night, I studied investing in apartment buildings at UCLA. Then I began buying, fixing, and flipping multi-unit buildings and worked my way up to a 46 unit building in Hollywood. Now, I need to tell about all the market fluctuations during those years and the impact on investors. However, this is getting too long for tonight so I will finish tomorrow. Thanks, Paul
    Doug Bennett
    Replied 6 months ago
    Mark, What are your thoughts on using 401(k) cash to fund property purchases now that there are no penalties and a payback period of three years? Assuming the properties were bought right (below market value) and there was positive cash flow and, of course, having an exit strategy in place at the end of three years.
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Hey Doug! I've never used 401k funds for purchases, but my CPA has suggested the idea. Seems like a good tool to have in your investing belt, especially when coming up with purchase funds. I'm far from an expert on this, and don't want to mislead, but from what I understand, you can buy real estate using leverage with some 401k plans. Alternatively, you can convert a 401k to a self-directed IRA and buy real estate. Both have rules and restrictions (for example, I think you can't self-manage if you use the self-directed IRA). I know that's not hugely helpful. But consult a CPA, or get the updated 2020 guidelines. My info may not be current. Good luck!
    Aaron Bryson from Global
    Replied 6 months ago
    Great post and analysis! I have some good takeaways from this.
    Tamar Hermes from Los Angeles, CA
    Replied 6 months ago
    Great article, Mark! It is incredible how ten good years keep us from remembering what it feels like in a downturn. I'm hoping that my diversified portfolio will get me through, but I expect lots of returns may flatten or even go negative in the short term. I see Real Estate Investing as a long term game, so while I am not thrilled with what is going on, I know that what goes down will eventually go back up-especially if it was a sound purchase out of the gate.
    Mark Hentemann Investor from Los Angeles, CA
    Replied 6 months ago
    Thanks, Tamar! Yeah, it's good to keep an eye on the long-term as we go through this. Hope Austin is treating you well!
    Steve Davis
    Replied 6 months ago
    Has anyone heard any mention if the Fed's will relax the 1031 exchange rules. It seems this would be an opportune time.
    Amber Scavone New to Real Estate from Tampa, FL
    Replied 5 months ago
    Mark, this was incredibly helpful for someone like myself who has never gone through a recession before. Thank you so much. @rickstout this is a great read.
    Mei Ling Schulz Real Estate Agent from Hollywood
    Replied 3 months ago
    Awesome article and it made me LOL twice!!