Recession in 2019 or 2020

That’s the prediction from an increasing number of experts. The chance of recession was raised from 19% to 23% by the CNBCFed Survey as of 12/18/2018. (https://www.cnbc.com/2018/12/18/cnbc-fed-survey-chance-of-recession-rises-to-23percent.html)

One of the metrics used to determine overall expectations of the economy’s future health and growth is the yield curves of treasury bonds. The expectation in a growing economy is that a longer-term bond, like a 5-year bond, would pay more than a shorter-term bond, like a 3-year bond. This is one of the principles of economic progress: we expect the economy to be better in a year than it is currently.

However, the yield curve between 3 and 5-year treasuries inverted at the beginning of December. The 7 and 10-year treasuries have been approaching inversion all year. This means investors expect the economy to be in a worse position in the long term (5-years) relative to the short term (3-years).

Yield curve inversions have preceded all seven of the previous recessions. The good news is that not all of these inversions immediately preceded recessions. The inversion for the most recent recession from 2007-2009 happened in 2005, about two full years before the point when experts commonly agree that the Great Recession started.

The bad news: this likely means a recession is coming in the next few years. The good news: we still have time to prepare for it.

In the world of real estate investments, a recession is not as bad as it is to the general economy. Some things we should expect from a recession:

  • Decreasing home values
  • Increased foreclosure
  • Increase in the % of renters
  • Decrease in the number of home buyers entering the market
  • Interest rate decreases as the Fed tries to stabilize the economy, and drive borrowing and spending

All of these can be helpful to a real estate investor looking to expand their portfolio. House prices will be lower, there will be increased supply, and a decrease in competition from owner occupied buyers.

Hopefully, this means open season for investors who are struggling with finding a deal that works for them.

However, keep in mind that financing options might change in the coming years during and following the recession. During the recession, from 2007-2009 and in the years since, banks tightened their requirements for lending, especially on investor properties. This is part of what lead to the rise of private lenders since about 2008-2010. I expect this to happen again during the coming recession.

This recession will not be the death of private lenders, but there is a shift coming. Plenty of investors currently work with small, local private lenders. This is a great strategy currently, because returns are high for both the investor and the private lender, while the risk is comparatively low. However, expect many of these private lenders to leave the industry or leave the market, as their risk will rise during the next recession. Some of their existing loans may go unpaid, and many of them may lose the liquidity of constantly making loans. If they have a $3M portfolio they can lend out, and three $200k loans go bad, they’ve likely lost their profit for the year. It becomes much riskier for them to continue business. Many of these lenders operate in the market in order to leverage funds for retirement.

Overall the coming recession means more deal options, but fewer financing options in the coming years. The good news, is that private lending will not die. The bad news is that it will go through a metamorphosis.

Lenders like RCN Capital will still be able to make loans during that time frame, and we won’t have the same restrictions that banks will.

Currently, we lend on 1-4 family non-owner-occupied properties, 5+ unit apartment buildings, condos, townhomes, and mixed-use properties. For a full view of the programs we can offer, you can view them all at this link: https://www.rcncapital.com/loan-programs/

Our interest rates, closing costs, and leverage will adapt to a new market, but our business will stay the same in concept.

In the spirit of preparation, reach out to private lenders now. Form the relationship with a private lender that will allow you to keep your business operating during a downturn. If RCN is a good fit for your business, you can reach out to me to get started, but if we’re not, still make sure to reach out to another lender who works better for your business.

 

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