Navigating the real estate market during an economic downturn can feel like walking a tightrope. On one side, there’s the potential for great deals and profitable investments. On the other, the risk of financial loss lurks ominously. This is your guide to walking that tightrope safely, even as the winds of economic uncertainty blow fiercely.
Recession real estate investing requires an understanding of the stages of the market cycle and their effects on real estate prices, loan access, and amount of time properties spend on the market.
Strategies for dealing with a recession include implementing strategies to recession-proof investments, investing in real estate syndications, and more.
Preserving investments involves exploring alternatives to traditional homeownership, focusing on recession-resilient investments, utilizing creative financing options, and mitigating risks through smart financial planning.
What Is A Recession?
A recession, in the simplest terms, is a period of economic contraction, usually marked by high unemployment, diminished consumer spending, and a decrease in commercial activity. A common rule of thumb is that two consecutive quarters of negative GDP (gross domestic product) growth indicate a recession, although more complex formulas are also sometimes used.
During these periods, the real estate market can be significantly impacted. Home prices often decrease, with an average drop of 5% each year that the economy remains in recession.
However, the real estate market is remarkably resilient and has the potential to remain consistent during recessions, thanks to factors like interest rates, unemployment levels, and the availability of mortgages and creative financing.
Stages Of The Real Estate Cycle
When thinking about your real estate investing strategy in the face of a potential recession, it’s important to have at least a basic understanding of the real estate cycle, so you have an understanding of the bigger picture.
Grasping the concept of the real estate cycle can help you in understanding how to navigate the real estate market during a recession, whether you’re buying, selling, or investing. Like a roller coaster, the market goes through ups and downs, each with its own unique characteristics and effects on property values and investment opportunities.
The stages of the real estate cycle are recovery, expansion, hyper-supply, and recession.
The recovery stage is the dawn after the long night of recession. The housing market begins to stir as home prices increase and inventory levels drop. Here, opportunity knocks for real estate investors to acquire properties at advantageous prices and set the stage for future gains.
The expansion stage is the market’s morning coffee. As the sun of economic prosperity rises, so do property values. It’s a golden period where the market thrives due to strong economic and employment growth.
But beware, if the coffee gets too cold, it could be a sign that the market is slowing down, signaling the onset of a potential recession.
If the expansion stage is the market’s morning coffee, the hyper-supply stage is the mid-afternoon slump. The market is saturated with properties (for example, a flood of new-construction multifamily properties), leading to an imbalance of supply and demand.
This can result in a decrease in property prices and a longer period on the market for sellers.
The recession stage, the market’s late-night, is the period where the real estate market can be impacted in several ways. Property values decrease, loans become scarce, and the time properties spend on the market increases.
Recessionary times can be challenging for many real estate investors, but the most important thing to remember is that the real estate cycle is just that – a cycle. That means that even the darkest times won’t last forever. If you’re stuck in a tricky situation, it’s a matter of coming up with creative solutions to help you hold strong until the market adjusts and starts to move toward the next stage.
Comprehending the various stages of the real estate cycle and strategies to navigate them can assist you in surviving the economic downturn in the real estate industry.
Understanding The Impact Of A Recession On The Real Estate Market
A recession influences the real estate market in a variety of aspects, including:
Mortgage rates steered by the Federal Reserve’s actions
A recession can seem like a sudden drop in temperature that affects everything, from the air we breathe to the clothes we wear. Let’s take a closer look at each of these factors and how they’re impacted by a recession.
Like sunshine boosting the growth of plants, job growth, including retail sales, fuels the demand for real estate. After all, if more people have jobs and thus are able to make and save money, that means that more people are able to buy and/or invest in real estate.
As job opportunities increase, more people migrate to those areas in pursuit of employment, creating a surge in demand for housing, both for rent and purchase. This phenomenon can sometimes lead to a housing bubble, where property prices become inflated and unsustainable.
But what happens when the sun doesn’t shine? Lower job growth can lead to lower demand for property, and thus lower property prices. This is often what happens during a recession, as unemployment rises.
Rental Rates And Vacancies
As with the ebb and flow of the tides, rental rates and vacancies can fluctuate during a recession. Economic downturns often result in job losses and financial difficulties. This, in turn, can lead to reduced demand for rental properties, as well as higher vacancy rates.
When people lose their jobs, they might move back in with their parents, move in with a friend, downgrade from a luxury apartment to a more modest one, etc. As that rental demand drops, rental rates often start to fall, and concessions (e.g., “First month free!”) increase, as apartment owners rush to fill their vacancies and reduce turnover.
The Role of Consumer Spending And Confidence
Consumer confidence and spending play a critical role in the real estate market during a recession. When consumer confidence is high, the demand for housing increases, driving up house prices.
However, during a recession, when confidence is low, people are less likely to make substantial purchases such as buying a home, which can further reduce demand and lower property prices.
Mortgage Rates And The Federal Reserve
The Federal Reserve is responsible for steering the economic ship through the stormy seas of a recession. Through raising and lowering interest rates, the Fed can indirectly influence things like consumer spending, mortgage rates, and more.
For example, the Fed might lower rates during a recession in order to stimulate growth in the housing market and economy, which can make housing more affordable and potentially raise demand during a recession. The Federal Reserve bank plays a crucial role in this process.
Real Estate Market Dynamics During Economic Decline
During a recession, the real estate market undergoes substantial shifts that affect home buyers and sellers, impact commercial real estate, and sway local market conditions. These dynamics, fueled by economic uncertainty, can sometimes be unpredictable, but understanding them can provide you with the tools you need to effectively navigate the challenges and ultimately reach your goals.
Effects On Home Buyers And Sellers
A recession can turn the real estate market into a chess game for home buyers and sellers. Buyers may face increased competition and higher prices, while sellers may struggle to find buyers willing to meet their asking prices.
Often, if buyers and sellers can avoid transacting during this time, many will choose to do so. Sellers don’t want to have to sell at a lower price than they expect, and buyers don’t want to have to pay more than they expect.
Impact On Commercial Real Estate
Similarly, a recession can also cast a shadow over the commercial real estate market. Businesses may shrink or even close down, leading to a decrease in demand for commercial spaces and thereby impacting the office sector.
With commercial multifamily, as unemployment rises and more people may lose their jobs, rental demand may decrease, along with rental rates. This can impact the overall valuation of commercial multifamily properties, as they are valued based on the amount of income they can generate.
As such, just like on the residential level, many commercial real estate owners and operators may choose to hold their properties during a recession if they’re able to, rather than buy or sell.
Influence Of Local Market Conditions
You know what they say – real estate is hyperlocal, and it’s the same when thinking about the impact of a recession on real estate, which can vary drastically with local market conditions.
Depending on factors like job growth, job diversity, and local leadership, the impact of a recession might be much more substantial in some markets versus others.
This is a big part of the reason why we look so closely at the fundamentals of each local market we’re investing in. Take job diversity, for example. If we were to invest in a market that relied on a certain job sector for 50% of its jobs, and that sector took a drastic hit due to the recession, the real estate market would be significantly impacted.
If, on the other hand, that market had greater job diversity, with no single sector taking up more than 25% of the jobs in that market, that would help to soften the blow.
In addition, local markets can be impacted by factors such as:
Rising interest rates, particularly if the market was already facing an affordability issue
Unemployment, particularly if related to a single sector that may not be able to bounce back quickly
Limited access to mortgages
Various factors can affect housing prices, including real estate prices, the national median listing price, and the overall demand for housing, which can also be influenced by the possibility of a slowing housing market crash.
Strategies For Dealing With A Recession In Real Estate
You know what they say – the best time to invest in real estate was 20 years ago, and the next best time is today. It’s the same with having a recession resilient real estate investing strategy. It’s important to plan ahead and to make sure you have ample buffer and backup plans for when the next recession strikes.
Your strategy may include things like:
Your strategy for buying a home or rental property during a recession
What to look for when investing in real estate syndications
Recession-proofing your investments
Buying A Home Or Rental Property During a Recession
Buying a house or rental property during a recession can be a great addition to your portfolio, especially if you’re able to secure a lower price and face less competition.
In order to ensure you’re in a place to take advantage of these opportunities, you’ll need to make sure you plan ahead. In other words, you’ll need to plan for things like the down payment and reserves, do your market research, connect with brokers, and evaluate potential lending options well in advance of the recession.
That way, you’re well-positioned to take advantage of the opportunities as they come.
What To Look For When Investing In A Real Estate Syndication
Similarly, when considering investing in a real estate syndication, it’s important to think ahead and be flexible. Take time to understand the financing structure of the deal, net operating income, whether the sponsor team has been through a downturn before, and what the plan is should a recession hit during the lifecycle of the project.
In addition, because a recession can impact different markets and sectors of the commercial real estate market differently, it’s important to stay open-minded to opportunities outside of your comfort zone.
For example, let’s say you’re used to investing in class A multifamily assets via common equity. However, as the market shifts, you’re not able to find any viable opportunities that make sense.
Rather than have your money sit idle on the sidelines, you might consider other types of investments, such as investing in multifamily via preferred equity instead, or investing in other types of assets, like hotels. This can help you diversify your risk and come out even stronger on the other end of the downturn.
Recession-Proofing Your Real Estate Investments
Recession-proofing your real estate investments is like fortifying your house before a hurricane – you need to make sure you do it before the hurricane arrives.
One way to do this is to stress-test your investment, through something like a sensitivity analysis. You might look at what would happen if vacancy rates were to rise. How high could the vacancy get before you would be underwater?
Another piece to scrutinize closely is your financing structure. How long is the term on the loan? Does it come with a fixed or variable interest rate? Digging into things like this will help you understand what could happen if interest rates were to rise and/or if you needed to hold onto the property longer than anticipated.
In addition, you’ll want to make sure that you have ample reserves for each investment, whether it’s a syndication or a rental property you’re managing on your own. If something were to go wrong, you want to make sure that the funds are already in place to cover any incidentals, rather than having to come up with the cash on the fly or being forced to sell at a discount.
On top of that, it’s important to diversify your portfolio to minimize your overall exposure. If all of your holdings were in a certain type of asset in a single market, and that market saw a dramatic impact from a recession, your whole portfolio could be in trouble.
If, on the other hand, you only had one or two investments in that market but also had investments in other sectors, as well as other parts of the capital stack, your potential risk is much more balanced.
By implementing these strategies, you can reduce the risk of your overall portfolio seeing a drastic hit from a recession.
Predicting Real Estate Trends Amidst Economic Turbulence
Forecasting real estate trends during a recession can be challenging, as every recession is different. However, by analyzing past recessions and real estate patterns, and keeping an eye on current economic research, you can forecast potential trends and make informed decisions.
Analyzing Past Recessions And Real Estate Patterns
Looking back at past recessions and real estate patterns is like studying the patterns of past weather events to predict future climate trends. It can provide valuable insights into how the real estate market might behave in future economic downturns.
If you’re considering investing in a particular asset type or market, take time to look back at how it was impacted by the last recession, as well as how well it navigated the recovery period. This could give you a glimpse into how it might fare during the next recession.
Keeping An Eye On Current Economic Research
Monitoring current economic research can be compared to regular weather forecast checks. It keeps you informed about the current state of the economy and helps you understand potential future trends that might impact the real estate market.
That being said, it’s important to keep in mind that real estate is hyperlocal. As such, you’ll want to look at both macro and microeconomic trends to get the most accurate understanding of what’s happening.
Preserving And Growing Your Investments When A Recession Hits
When a recession hits, it can be a scary time. However, if you plan ahead and focus on the things that are within your control (rather than things outside your control), you’ll be able to effectively navigate a recession and ensure that your portfolio not only survives but grows, even in the face of a downturn.
Recession-Resilient Real Estate Investments
Investing in recession-resilient real estate is a critical part of building a strong real estate portfolio. By focusing on strong fundamentals, diversifying your investments, and prioritizing long-term stability, you can protect your investments from the potentially damaging effects of a recession.
Creative Financing And Preferred Equity
Leveraging creative financing and preferred equity allows you to remain flexible in the face of a potential downturn. These financial strategies can help you secure the necessary funding for real estate investments without relying on traditional mortgages or loans.
Navigating the real estate market during a recession can be challenging, but with the right knowledge and strategies, you can weather the storm. By understanding the stages of the real estate cycle, the impact of a recession on the market, and how to preserve your investments, you can turn the challenges of a recession into opportunities.
Frequently Asked Questions
Do house prices go down during a recession?
House prices often go down during a recession due to the decrease in demand and willingness of homeowners to lower their asking prices, as well as banks selling foreclosed properties.
What is a recession, and how does it affect the real estate market?
A recession is a period of economic contraction that can lead to a decrease in home prices and diminished consumer spending. As a result, the real estate market can be significantly impacted.
What are the stages of the real estate cycle?
The real estate cycle is comprised of four distinct stages – recovery, expansion, hyper-supply and recession – each with unique characteristics and impacts on property values and investment opportunities.
How can I recession-proof my real estate investments?
To recession-proof your real estate investments, diversify your portfolio, ensure adequate liquidity, prioritize long-term stability, and focus on prime locations.
If you’re looking to invest in real estate syndications to help bolster and diversify your portfolio ahead of the next recession, we invite you to join the Goodegg Investor Club, so we can keep you in the loop on opportunities to invest alongside us.
You can also check out our open deals page to learn more about our current or upcoming opportunities.
If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101.
To learn more about us and our experience, be sure to download a copy of our track record, which shows the projected and actual returns we’ve achieved across all the deals we’ve exited to date.