You can’t miss the recession predictions if you read the news or watch TV. Economists and pundits of all sorts are predicting a recession, and soon. But you probably don’t need them to sound the alarm bells. If you bought gas or groceries recently you know that inflation is about as intense as it’s ever been in our lifetimes. High inflation is often the harbinger of recession.
From the history books
We may be in a recession now. If we’re not, we know that recession will come. The big questions are when and how severe. A common jibe about economists is that they have predicted nine of the last five recessions. I have two degrees in economics. The last time I predicted I recession I was correct, but five years early.
In the last 35 years, San Diego has had about 6 ½ years of recession and 28 ½ years of expansion. During a recession, buyers become scarce. That’s the opportunity.
San Diego’s last apartment price drop was in the spring of 2020. The fear and uncertainty of COVID disrupted apartment sales from February to May 2020. Six buildings out of 300 closed for less than they would have sold for 2019. By June 2020 the apartment sale was over. For all of 2020, local apartment prices rose about 5%, despite COVID and federal, state, county, and city regulations dictating that owners could not evict tenants for not paying rent.
Surviving the recession is too small a goal. Aim to thrive after it.
Savvy investors don’t plan to simply survive the recession. They plan to scoop up opportunities and come out of the recession stronger. You must act quickly because wise buyers capture good deals. Don’t expect screaming bargains in San Diego. Thousands of buyers know that our region needs 100,000 more rentals. Hundreds of other millionaires eagerly looking for even modest price reductions. A plan is essential, but not enough.
Human nature rears its head
To thrive after the recession, you need a plan, and liquidity and you need the courage to execute it. That’s easier said than done. Planning is the easy part.
In the Great Recession, my wife and I sat on the sidelines with several years’ cash in hand. We didn’t buy condos and single-family homes real estate, which had dropped 40% or more. Apartment sellers were not distressed. I missed the best buying opportunity in the last generation because we didn’t have the courage to buy investment properties that were the most severely discounted. I was not the only one whose unfulfilled fantasy kept me from acting on the current opportunity.
In the spring of 2020, there may have been 100 millionaires with abundant cash who would have bought apartments if prices had dropped 20% or more. The few who bought at 2019 prices did well. The vast bulk of investors were too greedy and so didn’t buy any discounted assets.
When the next recession is recognized, follow Warren Buffet’s counsel. “You want to be greedy when others are fearful. You want to be fearful when others are greedy. It’s that simple.”
What to do now
Few investors have ready cash during tough times. That’s part of what makes it a recession. People with cash and courage who buy during a recession sometimes capture five years of profit in a year. Either have the cash or convince the frightened seller that they will have no risk going into escrow with you. Be willing to release cash quickly or omit loan contingency.
Be aware that apartment prices may not drop 10% in the next recession. If prices remain the same, but the currency has depreciated by 10%, that in effect, is the price drop. If the number of potential buyers drops by more than half, then you may be able to buy without entering a bidding war. More than 2000 investors tried but failed to buy San Diego County apartments in the last two years. Many of those millionaires will be glad to have another chance to acquire assets in San Diego’s supply-constrained market.
Develop your plan. Identify your trigger points and action steps. Our team can help with that. I’m a much better broker from the experience of four recessions as a broker and an investor.
What’s your experience? What lessons have you learned from prior recessions?
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”