What Happens To Real Estate In A Recession And When You Should Buy

1September, 2020

What Happens To Real Estate In A Recession And When You Should Buy

As I write this, the coronavirus lockdown real estate recession has taken us all by surprise. This black swan event has led to unemployment numbers that are over ten times higher than what we saw in the Great Recession of 2008.

So the question is, what happens to real estate in a recession, particularly in this coronavirus recession? How will the real estate market as a whole be affected? And perhaps most importantly, when should you look to invest in more real estate?

In this article, we’ll look at the current recession, compare it with previous recessions, and look forward to the events to come in the following months and years, so that you’ll know exactly when it’s the right time to buy again.

What Is A Recession?

By definition, a recession happens when the economy shrinks for at least two consecutive quarters (i.e., six months of negative economic growth). This is measured by GDP (gross domestic product), which represents the total value of goods and services produced within a country – every home built, every latte sold, etc.

A recession, then, is a period of at least six months when GDP goes down rather than up. When GDP climbs back to pre-recession levels, the recession is over.

Right now, we’re technically less than two full quarters into the coronavirus lockdown, but the writing is on the wall. Unemployment is at record highs, and many experts are comparing this not just to the Great Recession of 2008, but to the Great Depression almost a century ago, when unemployment reached 25% and lasted not just months but years.

But, in every crisis lies opportunity. By understanding how recessions work and the typical sequence of events that occur during and after a recession, you can set yourself up to create life-changing wealth in the recovery following this coronavirus recession.

Where Are We Right Now, What’s Going To Happen, And When Should You Buy?

Based on what has happened in previous recessions, here’s a breakdown of what could happen to real estate in this recession and subsequent recovery period (with a major emphasis on “what could happen,” as we are living in unprecedented times).

Stage 1 – Unemployment Rises

Right now, we’re in the early stages of the recession, with unemployment continuing to climb as more and more businesses feel the full effects of the coronavirus lockdown. As of this writing, well over 30 million Americans are currently unemployed.

By comparison, during the Great Recession of 2008, 2.6 million people were unemployed. This means that the current coronavirus recession is more than ten times worse than what we saw a decade ago.

Stage 2 – Government Stimulus

As we’ve already seen, the government has stepped in in an attempt to keep the economy afloat, through the stimulus programs for individuals and businesses. While good for the short term, the government can’t keep printing money forever, so it’s likely that this stimulus will serve as just a temporary band-aid on a much larger problem.

The stimulus checks are also one of the reasons why April and May rent collections continue to be relatively strong. Most people haven’t been out of work for that long yet, and the stimulus money helps to cushion them financially for the time being.

But the question is, what will happen if and when the stimulus money runs out, people still aren’t back to work, and the economy still hasn’t recovered?

Stage 3 – Loan Defaults

During the next stage, as the recession continues and businesses continue to close down or operate at diminished capacities, we will start to see a wave of loan defaults. As tenants are not able to pay rent, and many real estate owners deplete their reserves, we’ll start to see more and more loan defaults, both for residential real estate loans as well as for commercial loans.

When this happens, banks will start to take over many of those properties, as they did in the years following the Great Recession of 2008, which brings us to the next stage.

Stage 4 – Bank REO

As property owners default on their loans, banks will start to foreclose on those properties and take over those properties that are not sold at auction.

This is when we’ll start to see a wave of bank REO (real estate owned) properties start to hit the market, as we saw in the months and years following the Great Recession.

Banks are not in the business of property management, so often, they’re itching to offload these properties quickly and thus, at a discount. This is when you should get your checkbooks out and prepare to buy.

Stage 5 – Time to Buy

As those bank REO properties start to hit the market at a steep discount from the prices we saw at the peak in 2019, that’s when you know it’ll be time to buy.

The question is, when exactly will this happen? The short answer is, it depends. It depends on a LOT of factors, to be honest. The full effect of the coronavirus lockdown is yet to be seen, and the coming months will be very telling.

Based on the speed at which the real estate market typically moves (i.e., not very fast at all), it’s safe to expect some amount of lag. What that means is that it’s very unlikely that we’ll hit this time of recovery before the end of 2020. The earliest that we might see bank REOs come on the market is in 2021.

Thus, now is the time to be patient and to make sure that you have ample liquidity prepared for when the time does come to buy. And if you’re investing actively in real estate (as opposed to passively investing in real estate syndications), we highly recommend you consider learning to raise capital, so that you can pool together money from private investors to take advantage of more deals when the time is right.

Stage 6 – Inflation

The final stage that we can expect to see is inflation. This is inevitable, as the government just printed trillions of dollars out of thin air. With that much extra money floating around, there’s bound to be inflation.

But here’s the thing. Inflation is actually a good thing for all of us as real estate investors. Why? Because inflation means that your money is getting devalued. That same dollar from 2019 might only be able to buy a fraction of what it can buy in 2022.

That’s why real estate is such a great investment, because it’s a hedge against inflation. When you invest in real estate with a fixed rate loan, you are locking in your payments, sometimes for 30 years or more. Even as your money becomes devalued, you are still making the same mortgage payments month to month, all while your real estate values continue to appreciate.

This, on top of the benefits of cash flow passive income and tax benefits, is yet another reason why we should all be investing in real estate.

What You Should Be Doing Right Now

There’s no doubt that we are living through unprecedented times with the coronavirus lockdown recession. There’s a lot of uncertainty about exactly how bad this will get and how long it will last.

However, by looking at the economic fundamentals, and by looking at the patterns and sequence of events from previous recessions, we can predict the high level stages that we’ll see in the coming months and years, how COVID-19 will impact multifamily syndications, and what will happen to real estate during the recession and recovery.

Whether you are new to real estate investing or have been waiting for years for this downturn, buckle up, because we’re about to see some once-in-a-lifetime deals flood the market in the coming months and years.

The best thing you can do right now is to educate yourself, get in the right mindset, and make sure you have liquid capital ready to deploy when the opportunities hit the market.

To learn more about passive real estate investing and how to invest alongside us in upcoming real estate syndications, be sure to join the Golden Bridge Investor Club.