Recession, Recession, Recession!
It's dominating the news cycles and everyone is talking about how it could play out and how bad it could get. But does anyone actually know?
Let's take a look at what we have seen so far and then get into what I think we may be heading into.
What is driving this market right now? Let's start with Interest rates, everyone knows that interest rates have sky rocketed since Feb of this year (2022). In early February you could still get a residential or commercial mortgage for right at 3%. Fast forward 8 Months later and you are looking at almost 7%. That is more than double which has a tremendous impact on investors since their cost of capital has exploded. This is placing downward pressure on Real Estate values and blowing up a lot of current deals that were pending. But how about all those who bought tight CAP rate deals between 2020 and 2022 who got variable rate bridge loans that expire in 24-48 months? Will they still be able to execute their business plan of raising rents and refinancing the loan in this high interest rate environment?
Now let's answer the question of why have interest rates more than doubled in 8 months time? The most common answer right now is "Inflation", Inflation is at a 40 yr high and doesn't show signs of slowing down yet. The CPI indicator is showing 8.3 % inflation rate, yet Most goods and services have jumped 10,20 and 30+ %. And that's not counting the costs of fuel and energy which have exploded upwards of 70% conservatively. So in reality the REAL inflation rate is more likely to be upwards of 15%. We have seen well over 15% increase in the costs of our materials and labor in the housing we produce and deliver to market.
All of this has led the FED (Federal Reserve) to go on the war path with "Inflation" as their declared enemy. They have said that they want to bring Inflation down to 2% and so to do so have dramatically raised interest rates consecutively since March of this year. But, despite more than doubling interest rates inflation is continuing to rage. Those who think that higher rates will be a "cure all" are likely in for a surprise. The battle against inflation that has been building for years will likely take a long time given the FEDs target of 2%. When was the last time we were at 2%? (it's been a long time)
To further complicate this struggle is the current administrations obsession with printing money as if there can be no consequence. But this is precisely what is pouring gas on the already roaring fire of inflation we are facing now.
Among other aspects are flat wages, poor consumer sentiment and reduced hours for employees and Americans. These coupled with higher costs of living and sky high energy costs are stretching many Americans much to thin in the wallet. It is not a sustainable way of life for most people.
Jobs : (Or lack thereof)
Currently they are still reporting good job numbers and low unemployment rates. Many are pointing to this as a good thing and that it indicates a "strong labor force & wages". While that might be true it might be wise to consider the other side of that coin. Many people are stretched thin on finances with todays elevated costs of living. Some who had planned on retiring may not be able to now because their retirements didn't take into account a 15% increase (or more) on their cost of living. Something like this will cause people to remain in the workforce longer when they otherwise wouldn't have. Others being caught short on cash are taking 2nd or 3rd part time jobs to make ends meet or maintain their quality of life. These would both contribute to artificially higher employment numbers that may not otherwise be there. Again we have to ask, how long can this last? At what point will those people throw in the towel and say forget it, I can't work this hard anymore?
The other aspect of the jobs market is all the headlines that are coming out almost daily now where companies are laying off people and cutting down their payrolls. Just today there was a headline where microsoft cut 1,000 jobs. I believe this trend will continue and we will see a lot more job cuts in the coming months. This will also be a contributing factor to driving the economy further into recession and flatlining consumer sentiment. Time shall tell it's tale, much better than any of us can predict.
Home Sales :
Home sales have continued to drop off a cliff the past month as more and more home buyers are priced out with steadily rising monthly payments. Locally we have seen homebuilders go months without any new buyer contracts. Homes that used to go pending in 24 to 48 hrs are now sitting for weeks without a single showing. This will cause much damage to the general economy since Construction and Real Estate are such massive drivers to the US economy. There are a lot of builders who made a lot of money between 2019 and the first half of 2022. The question will be how much of it did they hold onto to weather the economic winter that is now bearing down on us? Did they remember the lessons from the financial crash of 2008 or have the 14yrs that passed dim those memories? Those that didn't will quickly find themselves in trouble in the cash hungry business that is Construction and Real Estate.
It's not All Doom & Gloom :
Recessions are natural in the life cycle of economies. They are not always severe but more often than not they don't bode pleasantly either. The question will always come down to "How prepared are you?" Hopefully you have been preparing for the last couple of years for this very season. If not, here are some actionable tips you can use to help prepare yourself for it.
Immediately reduce and cut ALL unnecessary expenses (Stop eating out for every meal, post pone or cut back on that vacation you have planned, don't buy that new house or car that you can barely afford right now) Save as much cash as you can, have 3-6 months of reserves.
Get your mindset right. Level up what you are feeding your mind daily. (less sports and tv, more positive thinking books and materials)
Get REALLY good at your job. Become so valuable and so productive at work that everyone takes notice and your boss deems you to valuable to lose.
Be willing to do with less. Already deciding early on that you are ok with less (for a little while) if the situation calls for it can greatly reduce the blow to your energy and mindset that a sudden forced sacrifice often causes. By making this decision now you are already prepared in advance and can move quickly without the negative effects sacrifices usually have.
Overall recessions can be very tough and unpleasant for many people. But, for those who go into it prepared and ready, they are the ones who can take the most advantage to it. Recessions often represent a restructuring, a purging of the marketplace and opportunity. Everything is on sale for less and with less competition you are able to take up more market share. Often times individuals can get very wealthy on the back side of a recession because of the moves and decisions they made going into and through it.
I would encourage you to not look at this as a fearful or negative thing or event, but rather as an opportunity to recreate yourself and grow bigger and stronger in your market.