Is the recession near? Should you invest in real estate?

This is a reprint of a blog post I wrote on my website www.reidoc.net on March 18, 2022. I think it is even more relevant now.

I am neither a real estate analyst nor a financial analyst but going to give my opinion anyway. I cannot accurately predict the future nor can those who have “analyst” titles. We saw that in 2006 and 2007 when most economic experts told us that the market fundamentals are strong, and recession is unlikely. Are we seeing history repeat itself? The asset prices are through the roof. Real estate prices are seeing double digit growths. Inflation is at all time high. Fed has pumped money into the market through quantitative easing. Twenty percent of money in circulation was “created” by Fed in the year 2020. Inflation is at 7.9% (Feb 2022 data).

Is there a housing market crash on the cards? Every expert on TV is telling us that this time it is different. “Mortgage loan vetting process is better this time. Loans are given to only people who can afford it. They are not going to walk away from their homes.” Inflation and wage growth has tampered some of the impacts of this astronomical price rise. People are predicting that price will continue to rise in 2022; some forecasts say 10%! Same experts said housing market will crash during covid. Opposite happened. Often the experts come up with explanations after the fact.

There are two fundamental facts that have stayed constant over time. One- people are not rational creatures (otherwise everyone would have had covid shot by now). Two- economy goes through cyclical patterns. Every boom is followed by a recession. No one can predict the degree of recession, but it will happen. The bottoms in recession are often higher than previous bottoms and are often followed by another boom. In effect, if you look at long enough time horizon, the price of real estate will go up consistently. At least it must keep up with inflation.

Could it be that the eternal optimists on TV are wrong? I think so. There- I committed! I am certain that a correction in housing prices is coming but don’t know if it will be soft landing or painful recession. Same people who drove up the house prices due to FOMO are going to run in the other direction and will contribute to deeper downturn than necessary.

What should a real estate investor do in this situation? Should we stop buying real estate? Should we store our money in a bank account which is losing its value everyday due to inflation. Every syndicator out there tells us that there is a national housing shortage/crisis, and we are five million houses short. I am unable to find this original research. Maybe I am not looking hard enough. Having done medical research and statistical analysis myself, I am acutely aware of how widely variable the results can be based on underlying assumptions. But everyone wants to amplify results that are favorable to them (like a lab scientist who repeats experiment until they get the result they want). There is at least one report out there from a reputable firm (Zelman and associates) that says we don’t have a housing shortage. I don’t see anyone talking about this. The news sites don’t want to report it.

Keys to successful real estate investing in today's environment

1. Look for cash flow. Don’t invest based on appreciation assumptions. Make sure you have positive cash flow.
2. Don't over leverage in a raising interest rate environment. Make sure get a fixed rate loan for the longest term possible. Put down sizable down payment which will take you through the recession.
3. Invest in places where people are moving to and there is population growth. This is not a magic solution but does generally decrease your risk.
4. Hold on to your cash if you cannot find a deal that works but wait for the bottom. Easier said than done!

What do you guys think? Let me know in the comments below.

Remember, I’m not a financial planner, CPA or an Attorney, so take the things you’ve learned here as inspiration for more research, an open discussion with your spouse, and food for thought as you further examine the most efficient way to move toward your lifestyle and investment goals. 

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