Investors and a Recession
Economic conditions come in cycles just like it does in Real Estate. While there is plenty that will make investors happy, a time will come when housing prices will fall, leasing those that have made investments in real estate regret their losses. But what is the cause of a real estate collapse? Most look at a recession. No matter how dreaded this might seem, it is bound to happen at one point or the other. With our current economy and the path we are going, it is likely to happen sooner, rather than later so it is imperative that investors educate themselves just in case this happens.
Due to the uncertainty of the market we are in, people who have invested, whether it be quite a bit or lesser, in the housing market, most ask - How will this affect me as an investor. I am going to dive in to take a closer look at how an economic recession could impact the real estate market. Using historical situations, coming up with what might happen if this adverse event does in fact happen.
What is the housing recession?
Housing recession usually comes from “Speculating,” which is when investors buy houses to make profits from them when they make a sale in the future. It creates a high demand and skyrocketing the prices of homes. With more speculators joining in, a crash is imminent. When there is a downturn in the economy, those who took mortgages and loans may find it difficult to clear the debt, especially since we are seeing interest rates increase. In order to break even, most investors will start to sell their properties for lower rates, giving room for lower prices.
Even though a housing recession can hurt our country regardless of the economic environment, it is vital to understand that these events are usually short-term, meaning that recovery is achievable within a short period.
What causes a housing recession?
There are many factors that structure a housing recession. Some major causes of a housing recession can be affordability, false demand, and even a hardcore economic recession. When the purchase value of a property is too high, the demand reduces and investors must reduce those prices because the property is no longer in demand. Even with a price slash, buyers will still be skeptical because there may be something “wrong with the property” or question “Why is it not swooped up yet.” This is considered affordability in the market.
False Demand is another very important key. Due to the “speculation,” more investors are seeking loans and mortgages to buy their assets and sell them off at an even higher price. As long as investors are getting decent rates, this works, but if you are one of many buyers in the market, you are looking at slowly creeping interest rates which creates a faux sense of demand.
House prices during the Great Recession
In 2007, disaster struck as the economy plummeted, creating what most termed “The Great Recession.” The result of this specific scenario was extreme, millions of Americans lost their jobs and the housing market ultimately collapsed, sending the economy into a spiral. Although the housing bubble exploded, it is extremely important to understand that the crash stemmed from years earlier.
From 2000, house prices in America became high, and lending provisions that should have been more strict and iron-clad because loose. When the crisis became full-blown in 2007, numerous foreclosures and defaults resulted in the financial market crash. The value of homes attached to financial securities associated with subprime mortgages depreciated during this time. Subprime mortgages are terms issued by lenders to borrowers that are considered risky.
Since agents and buyers did not follow through with these, things got to an all-time low, resulting in a final collapse. The subprime mortgage collapse left millions of Americans without homes. With the economy spiraling, most people faced financial doom as the properties they purchased via mortgages had the value of their homes reduced significantly.
Although the US Government finally stepped up to prevent further damage, the housing market bared most of the negatives associated with this Recession.
How will a Recession now, affect the Housing Market?
According to the Econofact, 8 out of 10 recessions since World War II resulted from a downturn in the housing market. With this statistic, it is clear for all to see that the housing market has a significant role in which direction the economy will take. While we have seen what happened in 2007/2008, it is often questioned, how will this affect real estate investors and the housing market if history was to repeat itself.
After speaking with many investors, watching the market trends, and looking at the history, this question is one of the most concerning questions for Real Estate Investors. So, what is there to expect? Depreciated Prices, High Demand for Rental Homes, Increased Rent and Real Estate Returns. As we saw in 2008, a recession that happens now will most likely result in reduced housing prices. This may be great for some people who actually want to own or rent for a lower price, expect mortgage rates to continue to grow.
Looking at previous events, such as COVID, we can see that most overseas investors have lost to be triumphant in the US housing market. Although we are seeing some ease in restrictions, we may see an uprise of investments nearing. During the last recession, most buyers became anxious due to the uncertainty of the economy, and buyers who had every intention of purchasing a home had reservations due to the income flux. In the same conversation, rental homes will become the go-to housing during this time. Regardless of rental rates increasing, people often prefer these real estate assets due to their cost-effectiveness at the time.
With the potential recession hovering over our economy, most investors are looking to grow in the regions they invest in preparation for the recession. Most investors are acting as such, due to the lower home prices in the respective markets. When they have tapped their resources, they are looking for the next best area. As cities are growing, there will be certain perks to take advantage of, and with no surprise, investors are moving to these places.
With that being said, if you fail to prepare, you are preparing to fail. An economic recession is bound to occur at any time and as a real estate investor, you need to set yourself up for the fall. Save money as your savings will help pull you through when the recession hits hard. Build a network and never underestimate the power of NETWORKING. During a severe economic downturn, your network can help keep you afloat. Although engaging other investors, realtors, and wholesalers work, make sure that you are a priority to them! As you expand your network, look into other markets as well. Diversity and networking go hand in hand.
The biggest takeaway should be to INVEST IN YOUR PROPERTIES, which might sound strange to some. Increasing the likeliness of your property by doing some minor updates such as paint, carpets, or flooring, ensuring your roof is maintained and you have dry basements (where applicable) can increase the viability of your property. This makes your asset stand out during hard times, makes your property more pleasing and if quick cash is a concern, will make it easier to find someone to rent or even purchase, your asset. Although recessions are never a good thing, making sure you engage in this adverse event with your head held high, is crucial. Since you would have prepared for this scenario, making the right investments is necessary.
@Mike Mocek I appreciate your thorough review of the current economic conditions. I agree that there are still deals, but you have to adjust your underwriting process a bit. Your suggestion to invest into your investments is a great idea as well. It's never a bad idea to maintain or improve the properties you already own.