The Phases of a Recession & When You Should Buy Real Estate
There has been a lot of talk lately of a recession coming. With inflation hitting an all-time in 40 years – well exceeding the annual average rate of 3.24%. Everyone remembers the most recent recession when the U.S. housing market imploded largely due to subprime mortgages. The rebound from the housing market crash over the last 10 years has been quite a ride with low interest rates (an all-time low in 2020), low unemployment rates, and home values hitting new records – all of these factors created a housing boom.
Lately, we’re seeing a bit of turbulence in economic conditions that could possibly lead to an economic slowdown in the United States. The Federal Reserve is on a trajectory to increase interest rates and inflation is causing higher prices for just about everything from gas, food, housing. The cost of living generally has increased which is also causing economic uncertainty.
Each time there is a financial crisis such as a recession, it always seems to take everyone by surprise. So, if you remember the recent recession – the Great Financial Crisis of 2008, then you know it may be a good idea to start exploring different ways of protecting your investments now. Since WWII, the U.S. has experienced a recession roughly every 5 years. It’s a good time to understand the market conditions and what to expect in the next economic downturn and do some planning to get ahead of what may be inevitable – an economic recession.
What is a Recession?
So, how are real estate prices affected in a recession? How much is the housing market affected and what happens to housing prices? And, the most asked question is when is the best time to invest in real estate?
To answer these and other questions, we’ll review past recessions and current market conditions to identify where we are in a cycle. This will help you to be able to plan ahead and know the best way for you to proceed and navigate uncertain economic conditions.
When the economy contracts over the previous two consecutive quarters then that negative growth can constitute the beginning of a recession. This is based on GDP (Gross Domestic Product) which represents the total value of goods and services sold within a country. In simple terms when we have this contraction with GDP, we are technically in a recession, and when GDP returns to pre-recession levels, that technically constitutes the end of the recession.
Historically economic experts will look at trends leading up to The Great Recession of 2008 or even the Great Depression in the early 1930s. There are usually stock market fluctuations, the unemployment rate rises, interest rates rise, and economic activity slows.
By examining and understanding recessions and the sequence of events that occur before, during, and after a recession, you can purposely create life-changing wealth during the recovery period.
Where are we now, what should we expect, and when should we buy?
So, let’s take a look at where we are right now. Currently, we are still in a seller’s market simply because there is a shortage in the US of housing units – especially affordable housing units – the type that PCRP Group looks to acquire. But that is not the only indicator of where we are in the market. Research your local market and the US economy in comparison to the stages outlined below so that you can better prepare when to make that good investment.
Stage 1 – Unemployment Rates Increase
As mentioned earlier, the unemployment rate rises in the beginning stages of a recession. This is an early red flag. Businesses will feel the pinch of less revenue, which affects GDP, and subsequently, unemployment rises.
During the Great Recession of 2008, 2.6 million people were unemployed and during 2020, the US hit an astounding unemployment number of 30 million, a historic record.
Stage 2 – Government Stimulus
As a way to boost the economy, the government may create a stimulus plan to increase economic activity. This has happened since 2008 and still continues today in 2022.
We’ve seen, for example, the use of stimulus checks particularly during the pandemic as a way to encourage spending among Americans. But what happens next, when people are still unemployed and the money runs out?
Stage 3 – Loan Defaults
What happens next in a recession? Businesses will close and consumer spending decreases, which will likely cause defaults on bank loans – both residential and commercial. Also, homeownership rates fall and people move to rental properties. We saw this during the Great Financial Crisis of 2008.
As loan defaults start happening, banks acquire the properties, which brings us to the next step.
Stage 4 – Bank REO
When there is a wave of loan defaults you will likely see properties being sold as a short sale. When a bank acquires a property through foreclosure, you have REO (real estate owned) properties. Then a large number of REOs hit the market and property prices fall.
Banks don’t want to be in the property ownership business, so properties can be found at deep discounts. It is at this stage, with these lower prices, that real estate investors should be ready to find a good deal.
Stage 5 – BUY!
This will be contingent on many factors. But just remember that the real estate market is somewhat slow-moving. It’s not like the stock market that can tank overnight. That does not happen with real estate. So, there is time to review market trends, examine the historic trends and try to identify when the bottom of the market is.
This is the stage that is a great time for investors to jump in and buy. You will try to time it so that you are buying when market values are at their lowest. There could be years between the Bank REO stage, which typically isn’t when property values are at their lowest, and the “Buy” stage when they are at the lowest point. So, this means patience is important.
Stage 6 – Inflation
Rising inflation is the inevitable final stage that will usually lead to the next recession. Inflation is the result of additional money being flooded into the economy that will devalue the dollar and give less buying power ultimately.
This is the reason why a dollar today buys less than it bought 10 years ago, and why real estate is such an amazing investment in good times and in bad. Real estate is an excellent hedge against inflation because as inflation increases so too do rental prices and the market value of your real estate. So, your investment is keeping up with inflation.
In short, as the value of the dollar decreases your real estate investments appreciate in value too.
What You Should Do Now
Trying to time the market comes with guaranteed uncertainty for sure. We can only examine historical trends and economic fundamentals and go into an investment with the best idea of when to invest.
When a recession is ending, during the recovery phase, it’s likely that you’ll see unprecedented opportunities that you will want to be ready for.
In the meantime, the best thing to do is focus on educating yourself as much as possible so that you’re ready for the next big opportunity.
Also, real estate is almost always a good investment if you’re buying the right asset at the right time in the right market. You don’t have to wait for a recession to capitalize on making great returns if you invest in a multifamily real estate syndication. There are always great opportunities in the commercial real estate space if you know how to go about finding the right passive income opportunity.
To learn more about passive real estate investing and how to invest in upcoming real estate syndication deals join PCRP Group’s Investor Club, and we’ll present investment opportunities to you as they become available.
Until next time, Earn Passively & Live Abundantly!
Note: we are not financial advisors and are not offering financial advice of any kind. Please consult with your advisors before making any investment or financial decisions.
Ready to Learn More?
The best way for you to learn more about commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!