Thoughts on the looming recession

Since the Fed announced its rate cut on July 31st, talks of recession have consumed the markets. With the pending Fed meeting on September 17th, it is largely expected that a consecutive rate cut will follow. A continuation of rate cuts would indicate that the Fed believes the US economy is contracting, and thus we are more likely to be closer to the looming recession.

According to Economist John Mauldin, “Lower asset prices aren’t the result of a recession. They cause the recession. That’s because access to credit drives consumer spending and business investment. Take it away and they decline. Recession follows. The last credit crisis came from subprime mortgages. Those are getting problematic again. But I think today’s bigger risk is the sheer amount of corporate debt, especially high-yield bonds.”

Economists such as Mauldin are pointing to the high levels of corporate debt as the cause of the next recession, or in other words, the “bubble”. Bubbles occur when the market prices an asset above it’s true value. For investors seeking yield but wanting to avoid the risk of investing in corporate debt, real estate investments are a suitable option.

Real estate investments, particularly multifamily, are often recession-proof investments.  Multifamily real estate is recession-proof because during down markets renters have largely proven to maintain their rents. Such housing doesn’t carry the risk of other classes such as single family. The charts below show the percentage change in the prior year for rental and for sale houses from 2008 to 2018. As illustrated below, during the recession of 2008, rental vacancies dropped less than 1% in the following year while housing vacancies decreased by 10%. 

The Fed’s next meeting may indicate how quickly the looming recession could occur, but sophisticated investors will position themselves to be prepared in advance. 

What does Florida’s booming population growth mean for investing in Florida real estate?

The sunshine state’s population is soaring as more and more Americans are migrating south. It may be the beautiful weather and landscape, the favorable taxes, or the growing job market, but this appears to be a trend that is here to stay.

According to the Demographic Estimating Conference, Florida’s population will surpass 22 million residents by 2022. Florida is already the nation’s third most populous state behind California and Texas. For many, this increased growth is exciting as it brings about opportunity for the state, but it begs the question if the current housing supply in Florida real estate can meet this increasing demand.

Forbes reports that from 2010-2016, on average there were 114,744 new households per year, but only 57,952 new housing units. With the surge of population growth that we are witnessing in 2019, this disparity will only increase. Given this lack of availability, now is the ideal time to invest in Florida real estate that is so sought after to meet the swelling demand.

New households, families in Florida FIGURE 4 FROM STALEY, MILLSAP, AND NASTASI (2019)

Why is real estate the #1 long-term investment for Americans?

It’s no secret that real estate has been, is, and will continue to be a popular choice of investment. As individuals take a more holistic approach to their portfolio planning, real estate investments are receiving a bigger piece of the pie to add diversification and cash flow.

That said, it still came as a surprise to many (but not us), when a nationwide Bankrate survey revealed this month that real estate is Americans’ favorite long-term investment. With rate cuts and swinging volatility, too much uncertainty lies in traditional markets. Real estate investments may offer stability, cash flow, and the gratification of owning a tangible asset that when properly managed over the long term, can bring about capital appreciation.

As investors shape their portfolio with a long-term approach, real estate investment becomes the necessary choice to offer value that is becoming more difficult to find elsewhere.