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<\/p>\nIt\u2019s never fun to navigate stormy times\u2014but recessions are just as much a part of investing as sunny days. Smart real estate investment strategies will keep you steady, despite the rough waters of a financial crisis.<\/p>\n
This roller coaster start to 2020 might make you anxious about your investments, but the experts at BiggerPockets know exactly how to weather an economic downturn. Here\u2019s what you need to know about today\u2019s economy, including how to manage your existing investments and where to put your money next.<\/p>\n
An unprecedented global pandemic, the novel coronavirus\u2014also known as COVID-19\u2014has ground almost every nation and financial system on earth to a halt. What began as an outbreak within isolated regions in China has spread across the globe, growing exponentially. More people have now died from COVID-19 in Italy than in China, despite Italy being on lockdown for weeks.<\/p>\n
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There is currently no vaccine and early data show it to be extremely transmittable. Mortality rate estimates vary, with current case fatality rate estimates<\/a> hovering around 1.4 percent. The virus disproportionately affects the elderly and those with existing health conditions, especially autoimmune disorders.<\/p>\n The U.S. crossed 10,000 total infected persons on March 19th, accumulating 40 percent of that total in just 36 hours. We are still quite \u201cbehind the curve\u201d on accurate data; we won\u2019t know how widespread the virus is in America for a couple of weeks. We also don\u2019t know how well our national healthcare infrastructure can handle shortages in protective gear, respirators, and ICU beds. This is due to several main factors:<\/p>\n Because we don\u2019t know when we\u2019ll hit peak levels of infections, we can\u2019t know how long the economy will be running at the drastically reduced level we\u2019re seeing now. Logic dictates that some metro regions will have larger community outbreaks than others, but when it comes to interstate commerce, travel, layoffs, and industrial production supply chains, a problem anywhere in the U.S.\u2014especially in its largest cities, like New York City, which is currently on lockdown\u2014becomes a problem everywhere. The effects ripple and are felt by all.<\/p>\n As Larry Summers, former Harvard president and NEC chair under President Obama, put it recently<\/a>, \u201cEconomic time has been stopped, but financial time has not been stopped.\u201d We can seclude ourselves for a few weeks or months and our economy will \u201cbe there waiting for us,\u201d financial time doesn\u2019t pause. Rent and mortgage bills don\u2019t stop. Credit card bills don\u2019t stop. Suppliers don\u2019t stop needing to get paid. Taxes are still collected.<\/p>\n It\u2019s a different type of economic shock than what usually kicks off a recession. In essence, the world needs to limit economic activity in order to slow the spread of COVID-19.<\/p>\n In short, nobody\u2019s going anywhere and doing much of anything. It\u2019s an otherworldly standstill\u2014and we don\u2019t know how long it will last.<\/p>\n We are most certainly headed for an economic crisis. That is, for all intents, not up for debate anymore. Our current fiscal quarter, Q1 of 2020, will likely be considered the recession\u2019s official start date.<\/p>\n LEARN MORE:<\/strong> What is a recession?<\/a><\/em><\/p>\n The National Bureau of Economic Research<\/a> is the \u201cofficial scorekeeper\u201d of recessions. They have some discretion over what officially constitutes a recession, but the generally accepted definition is two consecutive quarters of declining economic output, as measured by gross domestic product (GDP).<\/p>\n An economic recession is a natural byproduct of the business cycle, which acts like a wave. There are peak periods, where GDP growth is at its highest, and valleys when GDP growth declines, the economy experiences negative growth, and a recession occurs. Why is the business cycle like this? Economies are made up of individual players, and individuals are prone to periods of greed, stagnation, optimism, and fear.<\/p>\n Expect to feel the most economic pain in Q2 of this year\u2014or April 1 through June 30. There will be a massive shortfall of economic output, simply based on the lack of travel and lodging, entertainment, eating, and social interaction. St. Louis Federal Reserve Bank President James Bullard recently estimated that U.S. GDP could fall by as much as 50 percent<\/a> in the second quarter of 2020\u2014and the unemployment rate could rise to 30 percent.<\/p>\n In fact, nearly every economist and investment bank now predict a global recession in 2020. Goldman Sachs estimates a 6 percent drop in U.S. GDP in the first three months of the year, followed by more than 25 percent cut to GDP in Q2.<\/p>\n The economic consensus now is that the U.S. and the rest of the world are not just seeing a market correction. Instead, we’ve entered a recession that could be deeper than any we\u2019ve seen in our lives. We most likely will not see a resumption of growth until 2021.<\/p>\n The stock market in the United States is falling faster and steeper than at any point in modern history\u2014the S&P 500 fell 30 percent in less than one month, entering into a bear market. The Dow Jones Industrial Average made a “death cross” in late March, meaning its 50-day average fell below its 200-day average. That’s often seen as a portent of worsening economic futures. To see a similar stock market crash ripple through the financial markets on Wall Street, you\u2019d have to go back to the Great Depression era.<\/p>\n The U.S. government is working quickly to provide relief to affected Americans. The Federal Reserve pushed through not just one but two emergency rate cuts in March. As a result, overnight discount rates\u2014used by large banks for short-term borrowing\u2014dropped to zero percent.<\/p>\n That\u2019s right. Zip. Zero. This zero-interest-rate policy is a drastic action, last taken at the depths of the housing crisis-led recession of 2008. It\u2019s like turning a water faucet all the way to the left. It\u2019s a maximum push to motivate lending and growth.<\/p>\n The government didn\u2019t stop there. On Monday, March 23rd, the Federal Reserve committed<\/a> to buy unlimited amounts of government bonds and mortgage-backed securities, promising to use its \u201cfull range of tools to support households, businesses, and the U.S. economy overall.\u201d The Fed sees the writing on the wall: \u201cIt has become clear that our economy will face severe disruptions,\u201d they say.<\/p>\n This unprecedented move in scale and scope will increase the Fed\u2019s balance sheet through what is called \u201cquantitative easing\u201d\u2014economists\u2019 fancy term for how the government injects money directly into the economy by allowing banks to swap assets for cash. The Fed used a similar device to spur growth while the global economy recovered from the 2008 recession.<\/p>\n While the central bank’s monetary policy responses attack the problems in credit markets, Congress is working to provide sweeping fiscal stimulus. Multiple massive coronavirus stimulus packages are on the table; the first package was passed in the Senate on March 18. It sets aside funding for free coronavirus testing, expanded food security programs, and paid medical and sick leave for small businesses.<\/p>\n A larger, more expansive bill to address the economic fallout is working its way through Congress now and would allocate more than $1.5 trillion to help stem the economic slowdown.<\/p>\n Even though $1.5 trillion sounds like a huge number, it\u2019s important to realize just how big the U.S. economy is\u2014we generated $20 trillion in GDP last year. If the estimates of some medical experts are correct and Americans have to practice \u201csocial distancing\u201d for several months, including travel bans, school closures, and all large gatherings shuttered, we could easily lose $3 to $4 trillion in economic output. That\u2019s real dollars that aren\u2019t being paid out to workers\u2014and thus aren\u2019t being spent.<\/p>\n LEARN MORE<\/strong>: The BiggerPockets Guide to Coronavirus Relief Programs<\/a><\/em><\/p>\n A third economic package being assembled by the U.S. Treasury Department would allocate $500 billion for two rounds of cash payments directly to individual taxpayers. The first payment would be made around April 6th, and the second payment on or around May 18th. These cash payments would be tiered based on household size and administered by the IRS.<\/p>\n The Treasury Department is also seeking $300 billion<\/a> in emergency small business loans in addition to a $50 billion bailout for the airlines and $150 billion for other hard-hit industries like travel and leisure.<\/p>\n The Department of Housing and Urban Development (HUD) is joining municipalities and states across the country in efforts to keep people in their homes and apartments at this time, despite the decreased consumer cash flow caused by the skyrocketing unemployment rate. The Federal Housing Administration (FHA) is instituting<\/a> an \u201cimmediate, 60-day moratorium on foreclosures and evictions for single-family homeowners with FHA-insured mortgages.\u201d The Federal Housing Finance Agency (FHFA) is directing Fannie Mae and Freddie Mac to do the same with all mortgages backed by either enterprise.<\/p>\n In addition, Freddie Mac and Fannie Mae will also be presenting forbearance options<\/a> to borrowers affected by the pandemic, and financial institutions and lenders are offering similar options, too. This would allow borrowers to have their monthly mortgage bill suspended for up to 12 months due to economic hardship caused by the coronavirus outbreak.<\/p>\n If you have a mortgage and are worried about being laid off or having your income drastically reduced, be proactive and contact your lender or mortgage servicing company. Chances are there are remedies to help you through this year.<\/p>\n When I asked J. Scott, the author of Recession-Proof Real Estate Investing<\/a><\/em>, his advice for investors who haven\u2019t weathered market downturns, he had\u2014unsurprisingly\u2014a lot to say.<\/p>\n \u201cI remember a couple occasions in college stumbling back to my apartment after a few too many drinks, the room spinning, lying on the edge of my bed and thinking to myself, \u2018I will never do this again,\u2019\u201d he says. \u201cAnd for a few days, maybe even a few weeks, that memory was enough to keep me from doing it again.\u201d<\/p>\n But the memory of the misery didn\u2019t last. \u201cThe pain, sickness, and nausea was no longer fresh in my mind, and I was free to be the same stupid kid, making the same exact mistake,\u201d he says.<\/p>\n What does this have to do with real estate investing? A lot, actually.<\/p>\n In the early-aughts, before the effects of the 2008 “Great Recession” started to fade, Scott spoke with a number of shell-shocked investors. All of them faced financial and investing struggles\u2014\u201cbut we made it through, each of us with a new-found perspective on what a massive economic shift could do to our industry and with a healthy fear of it happening again,\u201d he says. \u201cAt the time, it was hard to imagine the good times ever returning.\u201d<\/p>\n Things did get better. We\u2019re here, a decade later\u2014and like those hazy college nights, the memory of 2008 has faded away. \u201cI still have the memories of feeling scared, confused, and overwhelmed, and feeling things would never return to normal,\u201d Scott says. \u201cBut I just can\u2019t put myself back in that place to really feel it. It\u2019s more like a dream than a memory.\u201d<\/p>\n He\u2019s not the only investor that feels that way. Many have been operating like 2008 never happened, and have lost their perspective on how bad things can be. In this current crisis, Scott says he sees a lot of investors who are suddenly snapped back to reality, once again catching a glimpse of the potential bad times that real estate can bring.<\/p>\n Except we\u2019re not college students anymore. As real estate investors, we have the gift of hindsight\u2014and we can\u2019t hesitate to use it to keep our risk tolerance in check.<\/p>\n \u201cAs investors, we must always remember that things are never as good or as bad as they seem,\u201d Scott says. During the bad times, \u201cwe have to remind ourselves that the economy, the markets, and real estate itself is cyclical. It will get better. Things will return to normal, and we must make good investing decisions that will prepare us for when that shift back to \u2018normal\u2019 occurs.\u201d<\/p>\n Hindsight is important in good times, too. \u201cWhen it seems like the party isn\u2019t going to stop, when it seems like real estate prices will never stop going up, we need to remind ourselves that every bull market has an expiration date,\u201d Scott says. \u201cAs difficult as it can be to remember what it felt like last time, we must try to put ourselves back in those shoes so that we can adequately prepare ourselves for an unavoidable period of angst and uncertainty.\u201d<\/p>\n Ready to prepare yourself for a successful financial future?<\/strong> Sign up for a BiggerPockets membership and download the full guide to investing in real estate during an economic downturn, featuring more insights from Mindy Jensen and J. Scott\u2014and an exclusive excerpt from J. Scott\u2019s Recession-Proof Real Estate Investing<\/em><\/a>.<\/p>\n Here\u2019s what else you\u2019ll find in the full guide:<\/p>\n Already signed in? Download the full Recession Prep 101: Investing in Real Estate During a Financial Crisis<\/a> guide now. New to BiggerPockets? Sign up today to read the full guide.<\/a><\/p>\n\n
Does Coronavirus Mean the Next Recession Is Imminent?<\/h2>\n
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<\/p>\nWhat Is Happening to the Stock Market?<\/h2>\n
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<\/p>\nWhat Economic Stimulus Packages Can We Expect?<\/h2>\n
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<\/p>\nDon\u2019t Repeat the Mistakes of the Past<\/h2>\n
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<\/p>\nThe Best Recession Investing Strategy<\/h2>\n
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