The following post was written by Julien Leclair-Dionne, Forbes Councils Member, on Oct. 25, 2019 (Forbes.com) Julien LeClair-Dionne is a successful real estate investor, coach, broker and founder of HomeFluent, a technology-driven real estate company.
One of the questions I’ve been receiving the most often over the last year is, “Is now a good time to invest in real estate with all this talk of recession and housing downturn? Not to mention the market crashing and the real estate bubble busting!”
With everything happening in the world right now, from trade wars to Brexit and everything in between, it’s no wonder that investors and potential homebuyers are worried and want to avoid making a costly mistake more than ever.
What’s even more frustrating is that no one seems to agree or give a straight answer. Will there actually be a recession or not? Are we on the brink of a recession or a few years in waiting? Will it be short in duration or a long-term dilemma? Will it be a vast or a minor one? And more importantly, will it make real estate prices drop or not?
So, what should you do?
The first thing to realize is that a recession is always coming. Anyone who owns their home or invests in rental properties will weather any number of recessions over many years. For the past four years, I have been frequently hearing that the sky will fall and that the market could crash at any moment. This could have easily paralyzed me and stopped me from investing. However, it also would have stopped me and dozens of other investors from realizing the amazing gains that are entirely tangible over this period.
There are opportunities and deals to be had in every market. Successful investors who know how to work a recession never sit on the sidelines, but rather know how to recognize those opportunities.
How could this next recession impact you?
When I talk to people about their fear of a recession, what they’re most concerned about is for real estate prices to drop as significantly as they did in 2008. Canadian investors in particular are expressing concern about seeing more price drops, as was recently experienced in Vancouver.
In my opinion, that’s unlikely to happen. In 2008, real estate prices dropped significantly not as a result of the recession, but because the housing collapse is what caused the recession in the first place. Real estate performed relatively well in prior recessions.
In addition, market statistics are usually comprised of the entire country or an entire province or state. But when investing in real estate, investors are only concerned about what happens in a specific city, to a specific property type, in a specific neighborhood. In other words, when in a recession, not every property gets impacted equally. So, when investing in rental properties, a drop in property value usually does not have a big impact on rental rates.
Also consider where else you may be investing your money if you decide that investing in real estate might be too risky. Investing in the stock market is often riskier, with a much lower payoff. Keeping the money in a checking account won’t protect it against inflation. Buying low-risk mutual funds and bonds might be a good strategy for some of your portfolio, but it could make you miss out on big opportunities. Since no one knows when a recession will be coming with certainty, you must make smart decisions while considering the impact they will have. While precise market timing may be impossible, there are a few ways you can prepare.
Nine Ways To Beat The Recession
Here are nine strategies and things to remember to help investors win in the next recession:
1. Fundamentals are always important. You’ve probably heard that investors make money when buying, not when selling, the property, and that’s especially important when there’s economic uncertainty. A great deal at the top of the market cycle will protect your investment if and when a market correction happens.
2. Having goals and a long-term strategy will help you weather multiple recessions and reduce your risk significantly. Focus on the bigger picture.
3. In real estate, cash flow is king. A property that cash flows today is likely to cash flow during a recession. Even if on paper the value of your investment properties drops, if they cash flow positively, you’ll emerge from the recession a happy investor.
4. Buy quality properties in high-demand areas. I don’t believe in recession-proof properties, but good properties in great locations will do better in a potential market downturn.
5. Always analyze properties, and only buy at prices that make sense.
6. Keep healthy cash reserves and don’t over-leverage yourself.
7. Don’t panic and sell at the bottom of the market. Even if prices drop, they will recover. Economic cycles make property values go up and down, but over time, real estate historically always goes up.
8. Make a recession an opportunity. It may be possible to score a great deal on an investment property.
9. Always be ready. Opportunity can knock at any moment!
So, is it a bad time to invest in real estate?
If you buy the right property, at the right price, in the right area, I believe your investment will perform very well — even when a recession strikes. Because it will strike, but you will be expecting it. And you will be ready.
No one knows for sure when the next recession will occur. What is known, however, is that the “talked about” upcoming economic slowdown will not be caused by a housing market crash, as was the case in 2008. There are those who disagree and are comparing today’s real estate market to the market in 2005-2006, which preceded the crash. In many ways, however, the market is very different now. Here are three suppositions promoted by some, and why they don’t hold up.
SUPPOSITION #1 : A critical warning sign last time was the surging gap between the growth in home prices and household income. Today, home values have also outpaced wage gains. As in 2006, a lack of affordability will kill the market.
COUNTERPOINT #1: The “gap” between wages and home price growth has existed since 2012. If that is a sign of a recession, why didn’t we have one sometime in the last seven years? Also, a buyer’s purchasing power is MUCH GREATER today than it was thirteen years ago. The equation to determine affordability has three elements: home prices, wages, AND MORTGAGE INTEREST RATES. Today, the mortgage rate is about 3.5% versus 6.41% in 2006.
SUPPOSITION #2: In 2018, as in 2005, housing-price growth began slowing, with significant price drops occurring in some major markets. Look at Manhattan where home prices are in a “near free-fall.”
COUNTERPOINT #2: The only major market showing true depreciation is Seattle, and it looks like home values in that city are about to reverse and start appreciating again. CoreLogic is projecting home price appreciation to reaccelerate across the country over the next twelve months.
Regarding Manhattan, home prices are dropping because the city’s new “mansion tax” is sapping demand. Additionally, the new federal tax code that went into effect last year continues to impact the market, capping deductions for state and local taxes, known as SALT, at $10,000. That had the effect of making it more expensive to own homes in states like New York.
SUPPOSITION #3: Prices will crash because that is what happened during the last recession.
COUNTERPOINT #3: It is true that home values sank by almost 20% during the 2008 recession. However, it is also true that in the 4 previous recessions, home values depreciated only once (by less than 2%). In the other three, residential real estate values increased by 3.5%, 6.1%, and 6.6%.
Price is determined by supply and demand. In 2008, there was an overabundance of housing inventory (a 9-month supply). Today, the national housing inventory is less than half of that (a 4-month supply).
THE BOTTOM LINE: We need to realize that today’s real estate market is nothing like the 2008 market. Therefore, when a recession does eventually occur, it will very likely NOT resemble the last one.
Mortgage rates continue their six-week decline, falling to nine-month lows
Mortgage rates have been in a prolonged swoon, but it may be coming to an end.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average tumbled to 4.45 percent with an average 0.5 point. (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 4.51 percent a week ago and 3.99 percent a year ago. The 30-year fixed rate dropped below 4.5 percent for the first time since April.
The 15-year fixed-rate average fell to 3.89 percent with an average 0.4 point. It was 3.99 percent a week ago and 3.44 percent a year ago. The five-year adjustable rate average sank to 3.83 percent with an average 0.3 point. It was 3.98 percent a week ago and 3.46 percent a year ago.
Fears about a slowdown in global growth, stock market volatility and the government shutdown had stoked economic uncertainty, sending mortgage rates into a free fall. But last week’s strong employment numbers eased some of those concerns.
Investors began pulling out of bonds, causing yields to rise. Since sinking to an 11-month low last week, the yield on the 10-year Treasury has risen 18 basis points to 2.74 percent. (A basis point is 0.01 percentage point.)
Because mortgage rates tend to follow the same path as long-term bonds, home loan rates are also expected to move higher.
“Friday’s blockbuster jobs report eased fears, at least for the moment, of an impending economic slowdown, but comments from Fed officials and the minutes from December’s Federal Reserve meeting revealed that some monetary policymakers are concerned about slowing global growth — sentiment that could imply a slower pace of interest rate hikes over the next year,” said Aaron Terrazas, senior economist at Zillow. “Key economic data releases are on hold while the federal government remains shut down, clouding markets’ read on the state of the economy at a critical moment when there is growing uncertainty about underlying economic fundamentals.”
Bankrate.com, which puts out a weekly mortgage rate trend index, found that nearly half of the experts it surveyed say rates will rise in the coming week. Shashank Shekhar, CEO of Arcus Lending, is one who predicts rates are headed higher.
“It’s been a very volatile start to the year for mortgage rates,” Shekhar said. “After dipping to about a nine-month low, the rates have gone up in the last three days. Rising 10-year Treasury yields and stock-market favoring comments from Fed officials have been the main contributor. Both these factors may extend into the next week. There is also [talk] of positive momentum in the U.S.-China trade talks, which is another negative for the mortgage rates. Expect the mortgage rates to inch higher in the short term.”
Meanwhile, mortgage applications roared back after the holidays, according to the latest data from the Mortgage Bankers Association. The market composite index — a measure of total loan application volume — increased 23.5 percent from a week earlier. The refinance index jumped 35 percent from the previous week, while the purchase index climbed 17 percent.
The refinance share of mortgage activity was at its highest level in nearly a year, accounting for 45.8 percent of all applications.
“The first week of 2019 saw falling mortgage rates and a subsequent increase in refinance and purchase applications,” said Bob Broeksmit, MBA president and CEO. “The slow retreat in borrowing costs in recent weeks is welcome news for prospective home buyers, especially given last month’s stock market volatility and the ongoing government shutdown. Amidst this uncertainty, purchase mortgage applications were up 17 percent last week and 4 percent from a year ago.”
The MBA also released its mortgage credit availability index (MCAI) this week that showed credit availability decreased in December. The MCAI fell 7.3 percent to 175 last month. A decline in the MCAI indicates that lending standards are tightening, while an increase signals they are loosening.
“The supply of credit dropped in December to its lowest since February 2017,” Joel Kan, an MBA economist, said in a statement. “The decline was driven by a sharp decrease in the conventional credit space, as we saw the expiration of the Home Affordable Refinance Program (HARP). Credit availability in government loans was stable over the month, ticking up slightly. We also saw a decline in high balance and super conforming programs, which drove the decline in the jumbo index.”