What a week! I have found myself having this conversation daily, so I turned into a blog post! Is a recession coming? Short answer, YES! Longer answer below.
Triggers To Watch
I am not a finance expert by any means, but when you spend all day investing in real estate you have to learn a few tricks to staying up to date with markets.
Real Estate is so connected to financial markets, it would be a huge mistake to not pay attention to what is happening RIGHT NOW.
Bank of America put out a small list of some of the important indicators which they feel is the most important:
- Consumer Spending and Confidence
- Small Business Confidence
- Jobless Claims
- Lower US Mortgage Activity
- Likelihood of President Trump Being Reelected.
Consumer Confidence and Spending
This is one of the most important indicators of a recession because it is, what I like to call, the perception index. If people do not feel a recession in their neighborhoods, they will continue to spend money.
If people start to feel a recession locally, they will spend less. Currently, Bank of America is reporting consumer confidence did not meet expectations in February which is not a terrible thing.
This doesn’t mean a recession is imminent because it is still rather high given the trade war and this continued coronavirus. I would expect it to change for this month but that data isn’t out yet.
This could be the only bright part of the economy right now! So fascinating that people are not feeling any pressure from this economy. I know my industry is starting to feel immense pressure.
I can report my business is very slow compared to this time last year. Is a recession coming?
Small Business Confidence
This index is actually what concerns me the most. I personally feel small businesses are the ones that feel the recession first.
The Nation Federation of Independent Business (NFIB) puts out an index which is essentially based on a survey of their thousands of small business members. According to BofA again, if this index reaches 100 or below, expect a recession. Currently, it is at 104.3.
The fear economists are having though for this month as the coronavirus continues to pick up steam, is small businesses will invest less in their future and this index could come down.
CNBC is reporting that prior to the coronavirus, the numbers were very positive and staying strong at a 3.5% unemployment rate which is the lowest rate in 50 years!
The problem is that there is no way to predict how the current virus will impact our labor markets.
In CNBC’s opinion, the first sign of major cracks in the economy will be measured through the labor markets. If more people file for unemployment benefits, it is a sheer sign businesses are not investing in labor.
It is so hard to predict, but I can see it in real estate happening all the time. The amount of leads I get where they say, “I just got laid off and I’m trying to sell my house” is growing. The good news, is currently, they have a TON of equity so they can sell and put a good chunk in their pocket.
The downside, is a lot of people are refinancing and I’m fearful we will see underwater mortgages again. These people will owe more than their home is worth if prices correct 15-20%
Lower US Mortgage Activity
Currently, the Mortgage Bankers Association is reporting a spike of 30% on refinance applications which is great for families and investors looking to refi. With rates this low, I would refinance my rentals and maintain a mortgage that you can easily pay with rents.
If the market turns the way some folks are reporting, you will need to be prepared to lower rents to adjust with the market.
Likelihood of President Trump Being Reelected
Wall Street is actively monitoring this during the Democratic Primary. Oddschecker has President Trump winning reelection at 55.6% which is lower than prior to Super Tuesday.
BofA thinks that it is in economies best interest to reelect Trump however they also state Joe Biden would be “okay” as well lol.
I would argue they are only saying this because it promotes a sense of certainty for the financial markets. They know what they will get with a Republican Senate and President. If the tables turn, as I think they will, for Biden this won’t cause a huge sell off.
I think because Joe Biden knows how to be a politician and was VP during the Obama recovery, markets won’t sell off if he wins. Historically, markets shift regardless of the president. The president has a relatively low influence in trading.
So, Is a Recession Coming?
Things are happening so fast that as I write this, the S&P fell 7% in a day, Washoe County is banning travel for school related trips, Italy is banning all travel, and people are building toilet paper forts at home because they bought the ENTIRE Costco pallet.
I am not an economist, but I can tell you people in real estate are watching this happen in real time and are nervous. In my opinion, don’t buy a deal unless you know what you’re doing! I would hate to watch first time investors take a hard money loan only to not be able to pay it back with the sale of the property.
We are in interesting times and have to be cautious when investing right now. I firmly believe we are entering a recession and people just don’t know it yet. This resembles 2007-2008, and as humans, we love repeating history!
Are you feeling the impact of the coronavirus? I want to hear from you! Leave a comment and join the discussion.