Real Estate Health

For the first part of this year we at REITactics have been predicting a looming recession. Our last guesstimate was for it start in the second quarter of this year.

There were a lot of indicators pointing that way and premium REITactics members will get a detailed analysis but some of those indicators are not as solid in the recession camp as they were.

It isn’t uncommon for indicators to thrash about and be inconsistent with each other at times but does this make us rethink our position/prediction?

Yes… No… Maybe. Reading tea leaves is always hard.

Seriously though, the economy is fairly strong but we are now beginning to see the affects of the housing correction in some areas. There will definitely be local recession pockets around the country but will the economy as a whole experience a recession or even a significant pause?

Istill think so.

The latest CPI numbers are out and while the core numbers are stable, rising only 0.1%, the overall number is getting hotter. As the rise in fuel costs works its way through the larger economy the core number is at risk. It is not at immediate risk and there is no way the Federal Reserve is going to raise rates before they are absolutely forced to do so but their only real purpose in life is to walk the fine line between rampant inflation and devastating deflation.

So, to answer the question of this post, is a recession still likely?

I still think so. While we no longer have an inverted yield curve between short and long term rates there are still other significant indicators pointing to a recession.

What does this mean to a real estate investor?

Aside from the obvious buying opportunities we are going to move back to a time when the long term interest rates actually correlate to the short term rates.

That means, mortgage rates are going to rise.

How high? It wouldn’t surprise me if the 30 year fixed rate approached the 1995 levels of 9% with almost two points in the next 18 to 24 months.

That is very good news to a long term investor. Why? Because it will allow rent increases. As the long term mortgage rate rises and the underwriting criteria tighten, there will be more demand for rental housing. If you are a landlord your life is about to get a little bit better.

It is of course a double edged sword. There will be more renters but it is even more critical you check them out thoroughly before handing them the keys.

A recession is still likely, I’m just not as sure it will still be as soon or as sever as it looked a few months ago.