The truth about the economy that no one will tell you.
Since 2016, I have been hearing from other real estate investors that an economic crash is coming. Every time I attend a mastermind or real estate conference, someone eventually says, “The crash is coming. This can’t go on.” And then…it goes on. Now, we’re in our fourth year of an economic expansion that “can’t go on,” and most investors are finally starting to embrace the idea that maybe it will.
Unfortunately, this economic expansion is clearly winding down — and no one wants to believe it.
I recently researched to find out how many economists in the real estate sector are predicting a market crash in the near future. The total? Zero. Some are covering their bases with predictions of a “possible downturn in the next 12 to 36 months,” but that window is both too wide and too vague. And the investors who were adamant the good times couldn’t last forever? Well, they’ve been wrong so many times now, they’ve very nearly given up. After all, no one likes to be the lone cloud in a room full of sunshine.
I have experienced multiple economic downturns in my career as a real estate investor, and I can tell you from experience: When no one thinks there is a crash coming, that is when the crash will happen. I don’t know exactly how long we have, but I do know the tipping point is getting closer.
Here are just a few of the factors I believe are steering us on an increasingly unavoidable crash course with a significant economic downturn:
1. We are stuck in a self-perpetuating cycle of market manipulation.
The Federal Reserve’s job is, primarily, to control inflation while steering the U.S. economy clear of a recession. However, since 2008, the Fed has become increasingly immersed in the politics and policies that revolve around national consumer sentiment. For example, the latest Fed interest-rate cuts make no sense from a historical standpoint and, by all appearances, were mainly enacted to shore up investor confidence and keep stocks from tanking. Catering to the whims of Wall Street is not a sustainable, long-term plan for financial security.
Red Flag Warning: At some point, something has to give with this policy. Negative interest rates are getting closer to a U.S. reality all the time, and that will likely signal the beginning of the end for this historic period of economic expansion.
Real Estate Prepper Tip: Prepare now to buy later. You’ve probably heard plenty of investors say they wish they had bought more when prices were low. Well, you can be “that guy” who literally buys it all if you prepare now. This does not mean you should liquidate your portfolio, but it does mean you need multiple strategies in place that will enable you to access investment capital so you can add to your portfolio and implement emergency tactics to keep your business secure and profitable when economic tightening occurs.
2. Geopolitical uncertainty is more of a certainty than ever.
One of the things that any good economist will tell you is that “geopolitical shocks” can derail the most accurate of predictions, however rosy or bleak they may be. Geopolitical shocks include things like terrorist attacks, widespread I.T. issues like an internet super-virus, and trade tensions. With so many different destabilizers in play, many of which directly affect our industry, it is unlikely that housing will escape the next economic downturn wholly unscathed.
Red Flag Warning: Watch the U.S. dollar closely. If it begins to lose value against other national currencies, the trend could trigger hyperinflation. It’s unlikely that this will happen overnight, but other countries could catalyze this type of decline in value by artificially manipulating their own currency values. China has already begun implementing this strategy to pressure the U.S. in the ongoing trade war.
Real Estate Prepper Tip: Diversify your portfolio now. You do not necessarily need to buy precious metals instead of turnkey rentals, but your real estate portfolio should have a combination of long- and short-term strategic options for generating capital and cashflow. Implement strategies that will enable you to adjust over the next year, so you are prepared for any economic development.
3. Housing Affordability Problems are Spiraling Out of Control
In June 2019, ATTOM Data Solutions reported that a median-priced home was too expensive for an average wage-earner in 74 percent of U.S. markets. The real estate market will not tolerate this state of affairs indefinitely. Those markets will correct at some point, and the correction may well be particularly devastating in what is presently the $300,000-$600,000 price range because if interest rates rise back to a “normal” 5-7 percent, buyers for these homes will have to either begin earning significantly more money or simply hope and pray for rates to fall again.
Red Flag Warning: This red flag is already in effect. Housing markets that were previously considered “hot” are starting to post longer times-on-market and lower sales prices. Plenty of West Coast markets are starting to show signs of strain, particularly in the highest-priced portion of housing stock. As times lengthen and homeowners begin to feel the stress of waiting, we will likely see prices fall farther and faster, quite possibly sparking the fire sale that will signal the start of the next housing crash.
Real Estate Prepper Tip: Invest in recession-insulated areas that lag behind national trends. Shield your real estate business and your investment portfolio from the fallout by investing in assets located in parts of the country that have lagged behind in the recovery or that support recession-resistant businesses, like the life sciences, finance, tech, engineering, and certain types of manufacturing. Look for areas bolstered by a relatively low cost of living, since they will resist inflation longer. Focus on areas with diverse industries and populations. Place your capital in real estate assets that are less likely to experience vacancies, such as C-class properties instead of high-end class A developments.
Solution-Focused Investors are Successful Investors
Of course, you must be very cognizant of the future when you are investing with an economic shift in mind. After all, you are factoring in changes that are not yet reality. For example, it is possible that in 20 years, houses under $200,000 (as a median retail price) will be a permanent fixture in the past. That would be a big change! Investors who focus on value-add options will be well positioned even if there are major changes in the future. Look for areas where you can solve problems by making wise investments. After all, wherever you find the greatest need for a solution, you find the greatest opportunity to add value!