When I looked over my shoulder and saw these two fellows staring at me, it made me wonder if they were trying to tell me something. I definitely got the hint! I don’t think anyone would debate that real estate is now entering a bear market. The million dollar question is what does this really mean? Will this be a mild blip with a quick recovery or will there be a fundamental “reset” in the market. What is the data saying? What should you do?
Market is painting a rosy picture of the future.
We are interesting times to say the least with drastically conflicting data. The markets are acting irrationally compared to historical economic trends. For example in periods of high inflation, bond yields would be rising not falling and the stock market would be resetting along with the labor market and consumer spending. Here are 4 key data points that I am focusing on.
- Labor markets: Labor markets are the tale of two cities with most tech companies slowing hiring and/or cutting head count. At the same time the hospitality industry cannot hire enough people and wage growth continues to accelerate
- Consumer spending: Even with higher rates consumer spending continues to hold up and in many cases continues to increase defying most predictions.
- Stock and bond markets: The stock market made a historic comeback while at the same time the bond market has reset with yields plunging off their highs
- Predictions on inflation: The market is pricing in a swift end/reduction in fed tightening
Unfortunately, the market has not priced in the significant future risks. Other countries that are very similar to the US like England are pricing in considerably more downside risk
Bank of England predicts lengthy recession
The Bank now expects headline inflation to peak at 13.3% in October and to remain at elevated levels throughout much of 2023, before falling to its 2% target in 2025.
The MPC noted that the labor market remains tight, with domestic cost and price pressures elevated, adding that there is a risk that a “longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.”
“The labour market has remained tight, with the unemployment rate at 3.8% in the three months to May and vacancies at historically high levels,” the MPC said. “As a result, and consistent with the latest Agents’ survey, underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.”
Luke Bartholomew, senior economist at Abrdn, said the Bank’s forecasts make clear just how difficult the U.K.’s economic picture is compared with other major countries.
“The Bank is simultaneously forecasting a long recession starting later this year and an even higher peak in inflation. This is a toxic economic combination, which would be difficult for the central bank to navigate at the best of times, let alone when it is increasingly being dragged into the political spotlight,”
White house and Federal Reserve have head in the sand
The White House and Federal Reserve have their heads in the sand. The discussion about a recession reminds me of the discussion where both the White House and Federal Reserve continued to say that inflation was “transitory” and would quickly recede. We have all found out that this couldn’t be further from the truth as inflation continues to run 400% higher than their stated goals.
The same is occurring now. The Federal Reserve and White House continue messaging that they can achieve a “soft landing” where employment remains high and there is little impact to the economy.
At the same time the White house and Congress continue “stimulus” spending with build back better, the Chips act, etc… that will pump trillions more into an already overheated economy.
These two factors have made a soft landing impossible as inflation continues longer and hotter than expected and the federal reserve will have to raise rates further. This will lead to rates substantially higher than the market is pricing in along with a much larger stock market and housing reset.
Best case is the 90s recession
The big issue in today’s economy is inflation. As inflation continues the federal reserve will raise rates which will ultimately lead to an “engineered” recession. It is important to emphasize that this recession will be a recession engineered by the federal reserve to hopefully slowly let some air out of the economy which should help the recession be much milder than others. The recession with the most similarities to today is the 90s.
The 90’s recession was a very mild recession. We aren’t seeing the huge bubbles like we saw in real estate in 08 timeframe with crazy leverage using adjustable-rate mortgages. Furthermore, employment is robust, and the economy is growing, the federal reserve’s job for price stability will force rates higher which will lead to a moderate slowdown.
What happened to real estate values in 90’s recession
With the consensus of a mild recession in the offing, it is important to look at what happened during the last mild recession in the 1990s.
- Real estate prices dropped 14%
- It took 10 years for prices to return to the highs of 1989
Who will be impacted the most?
Anyone who has bought in the last year or two will have a higher risk of being underwater. For example, if you bought a house in Denver or Atlanta or Denver 6 months ago using an FHA loan with 5% down, when the market resets you will be underwater by around 10% off your purchase price. We saw during the last recession that the number one indicator of default is equity. The more equity, the less likely and vice versa.
What should you do now?
If you were considering selling in the next 3 years, now is the time before the market endures more pain. If you are a buyer, you have two factors to consider. Currently rates have dropped below 5 percent which is a big savings from just a month ago when rates crested 6%. At the same time prices are still high so there will likely be lower prices in the future. A buyer will have to calculate the optimal time and balance higher rates against lower prices.
As Mark Twain famously said, “history does not repeat, it merely rhymes”. Do not believe the hype out of the White House or Federal reserve that a “soft landing” is achievable. It is a given that we will have a recession, the only question is what happens in the forthcoming recession.
The upcoming recession will not be a mirror image of a past recession. It should be some sort of a blend as the factors that caused the 91 recession are different and furthermore the real estate market composition today is radically different. For example, in the 90’s there was no Airbnb or big corporate ownership of rental houses which will alter the market reaction to a recession.
Although I don’t see a 2008 repeat, there is a high probability of 15-20% drop in prices in most markets with some experiencing even greater drops. Although 20% sounds like a big drop, remember the national appreciation last year was 20% so the market would give back maybe a year of gains. Unfortunately, owners that have bought in the last couple years using a low down loan like FHA will quickly be underwater which could lead to more defaults and greater losses in certain submarkets.
We are a Private/ Hard Money Lender funding in cash!
If you were forwarded this message, please subscribe to our newsletter
I need your help! Don’t worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account! I do need your help though, please like and share our articles on linkedin, twitter, facebook, and other social media and forward to your friends 😊. I would greatly appreciate it.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).
Tags: Hard Money Lender, Private lender, Denver hard money, Georgia hard money, Colorado hard money, Atlanta hard money, Florida hard money, Colorado private lender, Georgia private lender, Private real estate loans, Hard money loans, Private real estate mortgage, Hard money mortgage lender