Are We in Another Housing Downturn?

"I believe the market will fluctuate"  J.P. Morgan

Everyone keeps asking me about the current status of the housing market.   People ask me if we are in a downturn?  Are we sliding back to a housing recession, they'll ask?

It's funny how people fret.   I remember the great one Zig Ziglar once said, "the media has accurately predicted 39 of the last 2 recessions".

What if it is?  What if it isn't?  Let's discuss:

If the housing market is indeed going into a recession, that means credit will freeze up and refinances will go out the window.    So look at the portfolio that you have, and create a strategy for each project on how you can get through the next 2 years with no new credit from traditional sources.

In addition, my advice is to also take advantage of long-term debt instruments either through buying notes or acquiring properties via subject to, and wrapping the resale to get the spread (arbitrage).    This by far is the fastest way to shore up your cashflow and build some equity.  There are fixed loans going into default every day in the 3-4% range.  Look at this screenshot of our deal list spreadsheet.

Let's just drive this point home with an example.   A $250,000 loan at 4% for 360 payments is $1193.54 per month w/out taxes and insurance.  So add a few hundred more for T&I and you're south of $1400 for a PITI payment.   In our market that $250k house would be a 3 of 4 bedroom and would rent for $1650-2150 depending on the neighborhood.      So you get in light, take on some non-recourse debt that someone else has already paid for via the closing table, and you're making 200-600 per month.    Let's do that 10x over the next 12-24 months (the average recession is about 22 months, source), and that's a good monthly income.  As your tenant buyer or tenant is making the monthly payment the P is reduced and if the market goes up, you can sell in the future for a gain.   Or keep forever if you love having tenants.

Do I think we're in a housing recession?  No.   We are in a minor correction that should last 6-9 months.  My guess is we will snap out of it in the spring as long as the Fed slows their rate hikes to give the economy a chance to catch back up.     Unemployment is strong and banks for now are still lending.

So pull up your bootstraps, stop fretting, and get to work.

Make Money Regardless of the Fed's Policy

The Fed will raise rates.  

Does that come as a shock to you?  It shouldn't.   The fiscal policies of the last 10 years have been like a drunk on a bender, grabbing everything he/she can to get the next little fix.

The most damaging was the Quantitative Easing policies from the last 2 administrations.    Both Presidents Bush (the younger) and President Obama subscribed to the philosophy of printing money to buy our debt (T-Bills) was not going to have an impact on our long term health.  It was a lesson many entrepreneurs and Americans faced in the last recession.  Borrow and borrow and borrow your lifestyle to keep the economy afloat.  (insert eyeroll here).

The country has a debt-crisis, more on that later.  The financial stability of your household should be primary concern, and it's ultimately what this blog is about.  How to build a portfolio of cash flowing assets that are fed-policy proof.   How to build certain safeguards into your investments so whatever happens in the economy, you make money.  If the stock market goes down, you make money.  If the fed raises interest rates, you make money.    How do we build a portfolio of assets that complete one another no-matter what the market.

Let's talk about my favorite and then I'll expand on this in my next posting.   Purchasing or investing in real estate notes is a great way to move to the wealth side of the money equation.  Structuring them in a way where you get to take advantage of the fed's policies.  Such as aligning your term and terms along with how the banks do it - tied to interest rates.  You can also have inspection periods and other terms that make your investment safer than other types of investments where you lack control.  The investment world is full of variation and negotiation, use this to your advantage.

If you have any questions about investing in real estate assets, I can't give legal advice because I'm not an attorney, and I can't give tax advice because I'm not a CPA, but I may be able to point you in the right direction if you post a comment below.

How the Fed's Policy Impacts Real Estate Markets

It's amazing how a bureaucracy can mess up a roaring economy 

From every angle, our economy was on the road to recovery.  For the first time in over 10 years, America was seen as a great place to invest from foreigners.  In September 2018, the Fed again raised interst rates for the 4th straight quarter in a row to 2.25%.   This is 2 percentage points higher than when President Trump took office.   This last announcement from the Fed to raise these rates have had a significant impact on the overall economy as well as the stock market and housing markets. 

What has been a great business climate and housing rebound, has suddenly become chaotic.  Stocks are up and their down.   Housing has certainly slowed and business are pulling back.     The Fed chairman and his yes-men think this is a good thing for the economy.  We need to "cool-the-jets" and have "controlled growth", is what they say.   What is supposed to be an invisible-hand with organic and raw growth, is yet again being controlled by government. 

It's no question the market has responded.   So what to do?

So, how does the savvy real estate investor respond to the changing environment?

Easy, two words.  Be cautious.   Ron Legrand once taught me that the most money you can lose if you lose your wallet, is whatever was in your wallet, therefore, and you can't lose big checks if you don't write big checks.  Today's investing environment requires prudence and caution.   Reduce debt, create free and clear assets where you can, and create more owner carry back opportunities.  Now is the time to position yourself for success into the changing climate, not once you're in the changed climate.  Act now.  Make decisions for the benefit of your portfolio.   We are.   I'll continue to post more tips as this market shifts. 

For now, make an impact and be grateful!

Coach Marc.