It’s never fun to navigate stormy times—but recessions are just as much a part of investing as sunny days. Smart real estate investment strategies will keep you steady, despite the rough waters of a financial crisis.
This roller coaster start to 2020 might make you anxious about your investments, but the experts at BiggerPockets know exactly how to weather an economic downturn. Here’s what you need to know about today’s economy, including how to manage your existing investments and where to put your money next.
It’s never fun to navigate stormy times—but recessions are just as much a part of investing as sunny days. Smart real estate investment strategies will keep you steady, despite the rough waters of a financial crisis.
There is currently no vaccine and early data show it to be extremely transmittable. Mortality rate estimates vary, with current case fatality rate estimates hovering around 1.4 percent. The virus disproportionately affects the elderly and those with existing health conditions, especially autoimmune disorders.
The U.S. crossed 10,000 total infected persons on March 19th, accumulating 40 percent of that total in just 36 hours. We are still quite “behind the curve” on accurate data; we won’t know how widespread the virus is in America for a couple of weeks. We also don’t know how well our national healthcare infrastructure can handle shortages in protective gear, respirators, and ICU beds. This is due to several main factors:
Coronavirus testing kits are in woefully short supply. Most people have to wait days to receive a test and another three to five days for the results.
The long incubation period lasts up to 14 days, or possibly even longer.
Because we don’t know when we’ll hit peak levels of infections, we can’t know how long the economy will be running at the drastically reduced level we’re seeing now. Logic dictates that some metro regions will have larger community outbreaks than others, but when it comes to interstate commerce, travel, layoffs, and industrial production supply chains, a problem anywhere in the U.S.—especially in its largest cities, like New York City, which is currently on lockdown—becomes a problem everywhere. The effects ripple and are felt by all.
As Larry Summers, former Harvard president and NEC chair under President Obama, put it recently, “Economic time has been stopped, but financial time has not been stopped.” We can seclude ourselves for a few weeks or months and our economy will “be there waiting for us,” financial time doesn’t pause. Rent and mortgage bills don’t stop. Credit card bills don’t stop. Suppliers don’t stop needing to get paid. Taxes are still collected.
It’s a different type of economic shock than what usually kicks off a recession. In essence, the world needs to limit economic activity in order to slow the spread of COVID-19.
In short, nobody’s going anywhere and doing much of anything. It’s an otherworldly standstill—and we don’t know how long it will last.
Does Coronavirus Mean the Next Recession Is Imminent?
We are most certainly headed for an economic crisis. That is, for all intents, not up for debate anymore. Our current fiscal quarter, Q1 of 2020, will likely be considered the recession’s official start date.
The National Bureau of Economic Research is the “official scorekeeper” of recessions. They have some discretion over what officially constitutes a recession, but the generally accepted definition is two consecutive quarters of declining economic output, as measured by gross domestic product (GDP).
An economic recession is a natural byproduct of the business cycle, which acts like a wave. There are peak periods, where GDP growth is at its highest, and valleys when GDP growth declines, the economy experiences negative growth, and a recession occurs. Why is the business cycle like this? Economies are made up of individual players, and individuals are prone to periods of greed, stagnation, optimism, and fear.
The economic consensus now is that the U.S. and the rest of the world are not just seeing a market correction. Instead, we’ve entered a recession that could be deeper than any we’ve seen in our lives. We most likely will not see a resumption of growth until 2021.
What Economic Stimulus Packages Can We Expect?
While the central bank’s monetary policy responses attack the problems in credit markets, Congress is working to provide sweeping fiscal stimulus. Multiple massive coronavirus stimulus packages are on the table; the first package was passed in the Senate on March 18. It sets aside funding for free coronavirus testing, expanded food security programs, and paid medical and sick leave for small businesses.
A larger, more expansive bill to address the economic fallout is working its way through Congress now and would allocate more than $1.5 trillion to help stem the economic slowdown.
Even though $1.5 trillion sounds like a huge number, it’s important to realize just how big the U.S. economy is—we generated $20 trillion in GDP last year. If the estimates of some medical experts are correct and Americans have to practice “social distancing” for several months, including travel bans, school closures, and all large gatherings shuttered, we could easily lose $3 to $4 trillion in economic output. That’s real dollars that aren’t being paid out to workers—and thus aren’t being spent.
A third economic package being assembled by the U.S. Treasury Department would allocate $500 billion for two rounds of cash payments directly to individual taxpayers. The first payment would be made around April 6th, and the second payment on or around May 18th. These cash payments would be tiered based on household size and administered by the IRS.
The Treasury Department is also seeking $300 billion in emergency small business loans in addition to a $50 billion bailout for the airlines and $150 billion for other hard-hit industries like travel and leisure.In addition, Freddie Mac and Fannie Mae will also be presenting forbearance options to borrowers affected by the pandemic, and financial institutions and lenders are offering similar options, too. This would allow borrowers to have their monthly mortgage bill suspended for up to 12 months due to economic hardship caused by the coronavirus outbreak.
If you have a mortgage and are worried about being laid off or having your income drastically reduced, be proactive and contact your lender or mortgage servicing company. Chances are there are remedies to help you through this year
Don’t Repeat the Mistakes of the Past
When I asked J. Scott, the author of Recession-Proof Real Estate Investing, his advice for investors who haven’t weathered market downturns, he had—unsurprisingly—a lot to say.
“I remember a couple occasions in college stumbling back to my apartment after a few too many drinks, the room spinning, lying on the edge of my bed and thinking to myself, ‘I will never do this again,’” he says. “And for a few days, maybe even a few weeks, that memory was enough to keep me from doing it again.”
But the memory of the misery didn’t last. “The pain, sickness, and nausea was no longer fresh in my mind, and I was free to be the same stupid kid, making the same exact mistake,” he says.
What does this have to do with real estate investing? A lot, actually.
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