Playing the Long Game With Real Estate
Try your best not to be a victim of clickbait. Whatever web news source you use is no doubt packed with ominous headlines. For the sake of this article, I clicked over to Google in real-time. These are the first few real estate-related articles I found:
New Data Suggests 'Serious" Market Correction
Challenging Real Estate Market Forced Layoffs of 18%
Major Commercial Real Estate Firm Looks to Cut Costs as Capital Markets Slow
Scary words – all of them, but one thing they don't consider is time.
Time is Money
How long does a typical recession last? You'll find that over the last 70 years, recessions have lasted anywhere from 2 to 18 months for an average of only ten months. To make you feel even a bit better is that recessions intentionally induced by the FED – which this next potential one will be – are the shortest. We might be looking only at a few quarters. Does the pain of a recession only last during the cycle - no, the residual effects drag out beyond its life, which may be impactful if you are holding a stock. However, it is a different story if you have real Estate, as long as you follow the non-negotiable rules. The asset produces cash flow. You bought it with the proper debt structure that allows you to continue to hold, whether fixed or floating. You went into the deal with plenty of capital reserves and contingencies.
Real Estate Can Shelter for a Better Day
If you follow these three essential rules, I caution you to ignore the noise. We may start to feel some pain as an economy during the latter half of 2023, although I am still not convinced, as job data show a tight labor market. The effects of this pain could result in some downward pressure on pricing and rents. But once the FED reverses its course, you will start to see cap rates compress and rents rise again, as we are still in a housing supply hole for the foreseeable future.
Thus, with some normalization, we could bottom out in the latter half of 2024, and then an upward cycle can begin. So if you planned to hold your asset for 3 to 5 years – no harm, no foul. There is no sense in fretting about something that bypasses the current environment. Well-positioned real estate assets can shelter for a better day. You can stay indoors while it rains outside,
Therefore, just as we factor time into our internal rate of return, we have to factor in time when considering how a recession impacts our portfolio and which asset classes have time as an advantage.
You Can't Believe Everything You Read
One final comment on click-bait headlines. We read headlines about layoffs but don't hear much about the US economy adding 200,000 to 500,000 jobs per month. We see articles about how home prices and stock portfolios are declining, and this is true, but declining from what?
Both home values and stock gains rose to another galaxy post-Covid, so rather than "crashing" as they might hint, values are only normalizing a bit. The US's net worth is still over 4x what it was following our last recession of 2008. Are corporations suffering? If they are adding nearly 500,000 jobs a month, that would not add up, and if fact, corporate profits are also at an all-time high.
Finally, in terms of a real estate crash, most economists don't see this either, as this nation is equity rich instead of over-leveraged. Not only do homeowners have a lot of equity in their homes, but they are sitting pretty with the sub-3 % mortgages they have. As a result, we are seeing extremely low foreclosure activity. The combination of equity and low fixed-rate mortgages keeps people from moving and only further exacerbates the supply issue,
By Playing the Long Game, You Can Absorb Any Shock
Your key takeaway is that we might be approaching a speed bump strategically placed by the FED to fight inflation. But if you are well positioned with inflation-resistant assets that take advantage of time, you won't even feel it. You can absorb any shock. You're playing the long game.