Recessions Can Be Long. When is the Bottom?
V-shaped recovery? U-shaped recovery? L-shaped recovery? W-shaped recovery?
Let’s be honest. NO ONE KNOWS. It’s just fun to guess.
Here is a great explanation for all the letter shaped economic recovery forecasts.
Inherent to all economic cycles are periods of expansion, peak, recession, trough, recovery, and a return to expansion.
According to the National Bureau of Economic Research (NBER), February 2020 was the peak in US economic activity so we are now in recessionary territory. With that in mind, the billion dollar question is, “when will the trough be so that we can start strategically buying?”
Buy low, sell high.
Again, NO ONE KNOWS exactly when the trough will take place. But bear with me for just a bit longer or scroll to the end for my educated guess (aka my SWAG).
New definition of Recession
Did you know that the definition of a recession is no longer “two consecutive quarters of negative GDP growth”?
The current definition of a recession is “a significant decline in general economic activity in a designated region.” — Investopedia
This means that the term “recession” can be called much earlier than done so historically.
Let’s table this stream of consciousness for a minute.
How real estate reacts to recessions
It really caught my attention and worth re-posting here:
- Commercial vs. Residential: In a recession, residential values react to an oversupply and a lack of demand which is a product of homeowners losing their jobs and putting their house up for sale all at once. When they start to sell, the lower sales comparables lead to lower residential valuations. Commercial is different in that during a recession, NOI decreases due to lower collections and decreasing occupancy which in turn, lowers valuations.
- Recession Phase: At the beginning, buyers hang on to pre-recession values initially and after about 4 months, they start facing reality and start selling for distressed pricing. Terry believes 7 months in is the perfect time to buy when foreclosures are at a peak.
- Recovery Phase: Values start to increase, unemployment drops, and rental rates/vacancies level off.
- Expansion: A seller’s market exists when low vacancy, higher rental prices, and construction begins. There are still good deals out there but one needs to look harder.
- The Hyper-Supply Phase: A period marked by many units available, rents on the decline but sales prices are remaining at a high level. This is the worst time to buy.
Let me guess the two things you’re thinking,
- “Gosh, this market does feel a little like that Hyper-Supply Phase. I’m seeing rents starting to tick lower and I’m not finding any deals that pencil because the asking price is too high.”
- “If NBER said that the recession started in February 2020 and this guy, Terry Painter, said the best time to buy is 7 months into a recession, then September 2020 is hunting season.”
If that’s you’re guess, it’s mathematically logical, but I offer you these five considerations:
- Mr. Painter’s research may have been based on the previously held recession definition of two consecutive quarters of negative GDP growth rather than the current definition that called the peak only after 2 months into 2020.
- The government and the FED have moved much faster than they have in previous recessionary periods with stimulus legislation and incredibly accommodating monetary policy, respectively.
- Some are actually making more money unemployed than when they were employed. (Forbes)
- For those that remember the pain of 2001 and 2008, does this feel the same to you? It doesn’t, right?
- The stock market is at record highs and it seems as if Elon Musk has the Midas touch.
Times are weird and what’s happening is unprecedented.
Need more proof that the market is weird? Last month, CNBC ditched the traditional bull and bear expressions and created a whole now market describer, the kangaroo.
According to acorns.com, “The good news (if we can call it that) is that on average, a recession lasts about 11 months, says the NBER. But they can be shorter and milder, or longer and more severe, as we know from the Great Recession of 2008, or even catastrophic, like the Great Depression of 1929.”
Let’s assume we use the NBER’s average recession term length:
- If the recession clock started in February 2020 (per NBER), then we have 5 more months to go. Start looking for buying opportunities in September 2020 and the trough will be around January 2021.
- If the recession clock started in June (after 2 quarters of negative GDP growth), then we have 9 more months to go. Start looking for buying opportunities in January 2021, the trough will be around May 2021.
- Don’t forget to build a healthy room for error. A very healthy room.
(Just like when I’m building an underwriting pro forma, the only thing I’m sure of is that once this blog is published, it’s already wrong.)
Some parting words:
- Be mindful of what’s happening.
- Hope for the best but prepare for the worst.
- By failing to prepare, you are preparing to fail.
- Stay safe out there my friends.
Agree? Disagree? Have additional thoughts to share?
I’m happy to engage with you in the comments so that everyone can learn. If you prefer to share privately, feel free to email me at email@example.com.
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