The next recession will eventually come, get over it!!!

2 Replies

I see so much talk on BP about the next recession and if people should wait to invest. My advice is STOP stressing about it and practice sound strategies that include fixed rates and cashflow! Investing, if done right, should NOT be something where you are worried about what will happen the next 1-3 years. It should be what will happen in 10+ years at least!

Those who don’t invest now will not have the knowhow and connections to take advantage of a recession when the time comes. As Brandon T always says don’t wait to buy real estate, buy real estate and wait!

Data point local to me, specifically Oakland.

Let's say you are an "idiot" and purchased in the worst year ever, 2007. And let's say you ignored everyone's advice and purchased in what was then a "rough" neighborhood, say Fruitvale. And then circa 2010 or so all your friends are making fun of you b/c you are "underwater." 

Now, let's fast forward 10 years. It's 2017. You stuck with it, kept making payments, etc, and now it's time to sell. That home, in the "worst case" scenario, is still selling for significantly more than you purchased it for. So you still come out ahead even if a "once a century" implosion occurs. 

During that 10 years, a lot of folks "walked" and "strategically" allowed their home to be foreclosed upon. Great, now they can't get mortgages for a while. And they are now your potential renters. Supply and demand sets prices, and that factor increasing rental demand more than offset the decrease due to the wider economy (source) (you can also see that "have pulse, get mortgage" actually drove rents down ahead of the crash... by contrast it is now pretty hard to get a mortgage, further driving rent demand):

And, finally, if you purchased in 2007 you probably got an ARM. For those that withstood the storm, their adjustable rates actually went down. Whenever someone calls me to ask about refinancing and tells me they are at 2.5% or 2%, I kind of automatically know it's a vintage 2005-2007 mortgage.

As long as you're not making whimsical assumptions about appreciation being "guaranteed at 10% per year every single year" and silly stuff like that to make your numbers work, you're fine. And to boot these days everyone is getting nice safe full doc 30YF loans, so it's not like anyone's fixed interest rate payment is going to balloon up on them. Indeed, inflation adjusted, I bet everyone's mortgage payment will actually be going down whenever the next cyclical recession hits.

On that note, one thing that does happen is that lending gets conservative when markets aren't doing so great. Everyone assuming they can just wait and buy real estate using a mortgage when the economy is down might just be in for a surprise. Some stuff that's no longer in effect, that were in effect during the Great Recession:

  • Couldn't count rental income from a departing primary unless you had 25% equity.
  • Max of 4 financed investment properties (currently: 10).
  • Many people were surprised that their HELOCs were cut off (& here they thought they had a down payment or three lined up!).
  • Was very rare for lenders to allow you to "count" new rental income.
  • FHA loans, which are common for folks just starting out (the very same folks trying to "wait"), had drastically reduced max loan amounts. Here in the SF Bay Area, FHA loans came close to essentially not existing.
  • You navigated all that, and 2 days from closing found out that the seller is actually upside down, and they can't even sell their house at all. 
Originally posted by @Chris Mason :

Data point local to me, specifically Oakland.

Let's say you are an "idiot" and purchased in the worst year ever, 2007. And let's say you ignored everyone's advice and purchased in what was then a "rough" neighborhood, say Fruitvale. And then circa 2010 or so all your friends are making fun of you b/c you are "underwater." 

Now, let's fast forward 10 years. It's 2017. You stuck with it, kept making payments, etc, and now it's time to sell. That home, in the "worst case" scenario, is still selling for significantly more than you purchased it for. So you still come out ahead even if a "once a century" implosion occurs. 

During that 10 years, a lot of folks "walked" and "strategically" allowed their home to be foreclosed upon. Great, now they can't get mortgages for a while. And they are now your potential renters. Supply and demand sets prices, and that factor increasing rental demand more than offset the decrease due to the wider economy (source) (you can also see that "have pulse, get mortgage" actually drove rents down ahead of the crash... by contrast it is now pretty hard to get a mortgage, further driving rent demand):

And, finally, if you purchased in 2007 you probably got an ARM. For those that withstood the storm, their adjustable rates actually went down. Whenever someone calls me to ask about refinancing and tells me they are at 2.5% or 2%, I kind of automatically know it's a vintage 2005-2007 mortgage.

As long as you're not making whimsical assumptions about appreciation being "guaranteed at 10% per year every single year" and silly stuff like that to make your numbers work, you're fine. And to boot these days everyone is getting nice safe full doc 30YF loans, so it's not like anyone's fixed interest rate payment is going to balloon up on them. Indeed, inflation adjusted, I bet everyone's mortgage payment will actually be going down whenever the next cyclical recession hits.

On that note, one thing that does happen is that lending gets conservative when markets aren't doing so great. Everyone assuming they can just wait and buy real estate using a mortgage when the economy is down might just be in for a surprise. Some stuff that's no longer in effect, that were in effect during the Great Recession:

  • Couldn't count rental income from a departing primary unless you had 25% equity.
  • Max of 4 financed investment properties (currently: 10).
  • Many people were surprised that their HELOCs were cut off (& here they thought they had a down payment or three lined up!).
  • Was very rare for lenders to allow you to "count" new rental income.
  • FHA loans, which are common for folks just starting out (the very same folks trying to "wait"), had drastically reduced max loan amounts. Here in the SF Bay Area, FHA loans came close to essentially not existing.
  • You navigated all that, and 2 days from closing found out that the seller is actually upside down, and they can't even sell their house at all. 

Preach brother! Preach!!! Hallelujah amen!

 

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