Thursday, December 20, 2018

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.

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