From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for October 27th, 2022

The upside of a little recession

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First, y’all miss me? It’s been a TERRIFICALLY busy summer, and I’m only beginning to catch back up on some important things, like this blog and my occasional newsletter. Mea culpa, all…

This morning, the Commerce Department reported that GDP grew at an annual rate of 2.6% in the 3rd quarter, shifting the down direction reported in the first two quarters of the year. Yes, folks, two down quarters constitutes a recession, and an up quarter marks the end. However, the apparent improvement is largely the result of fluctuations in things like international trade, and as Mark Zandi of Moody’s Analytics noted, “if you take a step back and look at GDP, it’s gone effectively nowhere over the last year… we’re kind of treading water.” Coupled with very real inflation numbers, and it’s no wonder there’s widespread concern.

I will note that I began my career in the stag-flation days of the late 1970’s. Double-digit inflation, interest rates in the teens, and flat-lined GDP were the norm. I don’t want to minimize the angst of today’s wage-earners and those just starting out on their careers, and acknowledge that the past 50 years have been hell on the working class. That said, though, our economy is generally pretty healthy and we’re in a good position to deal with the systemic underlying problems.

From a real estate investment perspective, though, recessions create opportunities. Many investments get over-leveraged in low-interest rate environments, and increasing interest rates may put before-tax-cash-flow under water. The owners may have little ability to re-capitalize, and new investors with the right amount of equity may find a bargain. Value-added deals may now be on the table, because tighter lending requirements may again call for a higher equity infusion.

Are these deals popping up yet? Not in my observation, and in fact there still seems to be a lot of dumb money chasing deals. I get an average of one cold-call per day asking if I’m interested in selling a given property. “Sure, what’s your offer?” That’s when the line goes dead, because all of these callers are reading off the same script, and all of them are bottom fishing for half-price sales from desperate sellers.

If the recession really is over, and the jury is still out on that, then sustained higher interest rates may still generate opportunistic deals for investors with cash. However, a sustained recession coupled with high interest rates will usually generate an assembly line of deals for investors with longer time horizons and staying power.

Written by johnkilpatrick

October 27, 2022 at 5:17 am

Posted in Uncategorized

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