This article was written in March 2020 and some information may be outdated.
1. The Future is Unpredictable
Everything in the economy is moving fast and the government is making rapid decisions on a daily basis. Statistics are based on historical data, thus we won’t know what the full effects are on the real estate market until at least a month or two from now. Many economists and experts believe this will lead to 2008 2.0 and we will fall into another recession or worse a great depression. Others believe this will be temporary and the economy will stabilize within a few months. One thing is for certain. We have had the longest economic expansion in U.S history for the past 10 years. Recessions are a natural part of a capitalistic economy and the economy works in cycles of ups and downs. Budgeting and managing one’s finances is critical in order to be prepared for future recessions.
2. Real Estate is Localized
The real estate market is localized which means certain cities and neighborhoods may see property values decrease while other cities do not. Some neighborhoods in Chandler still have not fully recovered from the 2008 crash as in market values never exceeded the purchase price while neighborhoods in Laveen and Phoenix have seen a rise in market values past all historical purchase prices. There is also a misconception by consumers that all properties appreciate in value. There are cities across Alabama and the Midwest where homes sell for 20-50k and have hardly appreciated at all in the past decade. Many of these properties are purchased by investors who repair the homes and rent them out for cash flow. However, these low end properties usually need lots of work done as they were built in the early to mid 1900s.
3. How Will a Recession Affect Phoenix?
I personally do not see the Phoenix housing sector falling into a recession as big as 2008. Outside of the virus, the demand to move into Phoenix is top 3 in the entire country, supply of homes and mortgage interest rates are also low. One aspect that can cause a short term drop in housing prices is unemployment and foreclosures. Many businesses are currently laying off thousands of employees and those who live paycheck to paycheck will suffer. The unemployment rate will skyrocket in the short term but should stabilize by the end of the year.
The government should provide easier access to testing and allow businesses and the economy to flow again within the next few months or else the recession will be inevitable and only get worse as time goes along. China has already allowed restaurants and businesses to open for business. There has to be a balance between caring for the health and safety of the American people and preventing a great depression.
4. Home Buyers Are Pulling Out Of Deals
Currently, real estate is at a massive halt across the country. Buyers are backing out of deals due to fear as well as uncertainty surrounding their jobs, businesses and investments in the stock market. There are very few open houses being held in Phoenix and the ones that are being held are seeing very little foot traffic. Currently, homeowners are also scared to put their house on the market. Title, mortgage, appraisal, inspection and other real estate companies and brokerages are either closed or backlogged due to a massive shift towards towards working from home. Mortgage companies are backlogged due to a high demand to refinance loans. Homeowners may want to think about holding off on listing their homes until late April or early May to allow the market to stabilize. If you decide to place your home on the market now, you should be prepared for longer than average closing dates. One way to avoid that is to aggressively price your home below market value to incentive buyers to jump at the opportunity.
5. Tips & Lessons to Survive Recessions
- Always have 6-12 months worth of living expenses saved in an emergency fund.
- Invest in value add rental properties that are below market value to ease the damage during recessions. Real estate is the best possible investment class. You have limited knowledge on public corporations and that is proven by how prevalent insider trading is across the stock market. You have no real control over the stock market. You do have control over the real estate investments you purchase and the decisions you make surrounding it. The market condition is irrelevant when purchasing rental properties if you follow an intelligent decision making model. The benefits to investing in real estate include appreciation, loan pay down, cash flow from rents, tax benefits and the positive benefit of inflation since mortgage payments stay the same for 30 years.
- Diversify into index funds in an IRA or Roth IRA through dollar cost averaging every month. Invest more when the market is down and less when the market is overheated.
- Budget your expenses through excel or the mint app and don’t overspend your disposable income or get car loans unless the numbers fit into your budget.
- Cash out refinance your loan to a lower interest rate if necessary to get you through downturns in the economy.
I have high hopes that most of the economic damage will begin to restore itself by the end of the year as the government eases off restrictions. Everything is temporary and there is always light at the end of the tunnel.