Nowadays, economic cycles, especially recessions, are receiving a significant amount of attention in discussions. It has come to my attention that many people have the fixed idea that when there is a downturn in the economy, the real estate market would be negatively affected to the same level as the overall economy and other asset classes.

Most people are under the wrong idea that there is a strong link between real estate and the overall economy. While it is true that the real estate market can be negatively affected by recessions sometimes, there is a much weaker connection between the two.

In fact, throughout more than half of the previous 34 recessions over the last 150 years, real estate has either not been impacted at all or hasn’t been affected nearly as badly as other asset classes like equities. This statistic can be found by looking back throughout the previous 34 recessions.

Why is real estate not affected to the same level as other industries?

Here are a few explanations

There are various types of investments, but real estate is not one of them. Because real estate assets come with their own objective value, they are often less vulnerable to the influence of economic factors.

In general, economic downturns follow prolonged periods of rising inflation. Where do you recommend individuals keep their money in an inflationary environment? Real estate. Real estate is a fantastic hedge against inflation because of the value of the underlying asset and the debt that could be related to it.

Some investors seek property investment to protect their money if the share market or other types of assets are experiencing a downturn. In contrast to investments in a number of other asset types, real estate value rarely goes to zero or even gets close.

Due to these factors, the real estate market often demonstrates performance that is anti-cyclical in comparison to that of the overall economy.

What Economists are saying

An American economist by the name of Henry George published a paper in the late 19th century explaining why our economy fluctuates in waves at regular intervals (remember, this was before the Federal Reserve existed). In contrast to modern economists who think that fluctuations in interest rates and inflation cause cycles, George argued that the primary factor underlying these cycles was an investment in land prices.

The following is George’s view on how the boom-and-bust cycle that we observe in the economy was produced by land speculation:

First, we must acknowledge that the available land area is limited and cannot be increased in any way. This phenomenon is referred to as inelastic supply in economics. When the supply of a good or service is inelastic and demand for that good or service grows, the cost of that good or service also increases. The value of land goes up in direct proportion to the level of market demand for it.

Next, we are going to assume that real estate developers, overall, buy property to develop it right now and then resell it in the not-too-distant future. The costs developers are prepared to pay for raw land indicate how much they believe they will be able to sell the building in a year or two if they begin developing the site right away. However, when the economy is booming, investors (people like you and me) will continue to acquire land on speculation. This means that they won’t develop the property right away; rather, they will keep it as an investment with the expectation that the price will rise in the future. Because of these speculative acquisitions, land prices have increased, so developers can no longer generate a profit. As a result, developers have been forced to cease purchasing property.

History of Real Estate During Economic Downturns

When real estate developers stop purchasing land, they also stop constructing buildings. And when they stop constructing, this generates an economic wave that spreads across the economy, impacting businesses such as construction, production of heavy machinery, and manufacturing of building materials. This leads to a decline in economic activity, particularly in those sectors of the economy.

Ultimately, land speculators realize that they will not be able to earn a profit from their property acquisitions. As a result, they begin selling off their inventory at discounted rates, which stimulates the activity of land developers once again. The process starts again with developers developing and manufacturers selling, then goes through the whole cycle again.

In the past 160 years, this real estate market cycle has behaved in a highly reliable way. This cycle has its unique timeline and happens less often than the overall economic cycle, commonly referred to as the “business cycle.” Throughout history, it has happened on average once every 18 years. This 18-year cycle has been surprisingly continuous, creating real estate market downturns irrespective of the larger economic downturns that are often discussed. The only exception to this remarkable consistency came during the few decades that followed the Great Depression.

Final Remarks

Generally, I am of the viewpoint that both the economic and real estate cycles exist and that they are influenced by distinct economic factors, although they are frequently connected.

I believe that the depth of the Great Recession in 2008 was compounded by the fact that the economic and property investment cycles both entered a downturn at the same time. The downfall of the real estate market occurred precisely as predicted, approximately 18 years after the beginning of the previous significant real estate crisis in 1989, which resulted in a correction of more than 25 percent in several areas. In addition, we were around six years into the economic cycle following the 2001 downturns, which is the average amount of time between business cycles over the last 150 years. Therefore, 2008 might not have been essential; yet, for those who pay attention to cycles, the date wasn’t all that shocking.

While I won’t pretend to have any strong understanding regarding whether or not the real estate market will be affected by the impending recession or, if it is, to what extent it will be affected, I will clarify that I don’t believe it won’t be affected at all. Anyone who assumes that the real estate market will inevitably experience a recession as severe as the general economy or other asset classes should be wary of making that assumption. The real estate market could take a knock. However, if previous experience indicates, it’s unlikely that anything substantial is on the horizon.

If you have confidence in the historical patterns of cycles, you need to be more concerned about the status of the real estate market in 2026, which will be 18 years after the most recent significant fall in the real estate market.

Real Estate Opportunities During Slowing Economies

When the economy dips so do real estate values presenting opportunities for the savvy investor as well as new real estate investors. What’s more important is having a real estate investment property lender that can quickly deliver the right financing amounts and terms to make it more the worthwhile to invest in such recessive markets.

New City Financial has over 20 years of real estate funding experience funding from as little as $75,000 to over $50 Million in real estate investments. Get a quick real estate investment financing or refinance quote here: or call 855-848-2862.

Since the start of this year, many famous housing market experts have been predicting that there would be a significant change in the housing market in 2022.

Over the course of the last two years, the real estate market has been uneven and tilted heavily in favor of sellers. It is common practice to engage in bidding wars, make offers higher than the asking price, and forgo any conditions. However, purchasers are regaining some of their influence in the housing market due to rising interest rates, a drop in accessibility, and the growing threat of a recession. 

The market’s fundamentals are expected to evolve, resulting in a significant slowing of growth rates, which might even become unfavorable. However, the property market is very specialized, and I think that the situation that will most likely play out over the next several months is one in which certain regions will see a fall while other markets will continue to rise, although at a much more controlled rate than in the previous few years.

The question that comes next is, which areas have a potential for price declines, and which markets will see prices remain stable or perhaps increase. In this piece, I will analyze data to assess the short-term health of different real estate markets throughout the United States. This analysis will assist you in recognizing opportunities and making smart decisions on investments.

In-Depth Analysis

In order to better understand regional variations, let’s first look at national housing market statistics from June of this year.

To start, the things that matter most, like pricing and appreciation rates, haven’t changed all that much as of yet. The annual increase in the median price of a property for the week that ended July 3 was still around 12.5 percent. This amount of growth would be unmatched in any pre-pandemic era, although this figure represents a decrease from the previous summer’s high when appreciation rates were about 20 percent.

Even while prices have not yet decreased nationally, it is essential to note that year-over-year price reductions have increased by about 4 percent and are now at a much greater level than ever since at least 2019.

A short remark about pricing decreases: They are worth keeping an eye on, but I don’t place too much stock in this data point. Price decreases are often caused by aggressive selling activity rather than a lack of demand for the product. After two years of exceptional selling strength, I would anticipate a rise in price reductions across practically all markets, even the powerful ones. I am concerned when I observe significant price decreases (the year-over-year rate of price decreases in Austin, Texas, has increased by about 500 percent), but I am not as concerned when I see rises in the double digits.

A decline in prices might act as a leading signal for movements in the market; nonetheless, this indicator should be studied in conjunction with other signs.

Both the number of active listings and the number of days on the market (DOM) need to grow for home values to either level off or fall, as I’ve said in previous writings of mine. This is the primary change in trend that has to take place in order for housing prices to stabilize or decline. You can read the whole discussion of why I think this here, but in a nutshell, active listings and days on the marketplace are excellent metrics of the equilibrium between supply and demand in the housing market. When there is a limited inventory and days on the market, the market is considered to be in the seller’s favor, and prices often increase. Buyers gain leverage when inventories and days on the market (DOM) grow, resulting in either stable or falling prices.

According to the data that Realtor.com offered, active listings are beginning to rise on a national level and have increased by almost 19 percent compared to June 2021. To be clear, the number of active postings is still far lower than before the epidemic. However, we are no longer in the period of falling inventory (as compared to the previous year), which lasted from April 2020 to May 2022 inclusively.

On the other hand, the number of days a home spends on the market (DOM) is still very close to an all-time low and is around fifty percent of what it was in 2019. This indicates that demand for homes is still rather high nationwide. If there had been a decline in demand, listings would have been on the market for longer, but this is not the situat

It is crucial to highlight that in both figures, part of the recent rises may be due to seasonality. You will observe that the number of active listings and the DOM tend to increase during the summer and decrease during the winter; you will need to consider this. We will consider DOM successful once it has shown year-over-year growth, which has not occurred as of yet.

The real estate market seems to be beginning to change, however little, on a national basis, but the move is likely to be slow. The days on the market (DOM) continue to be low, indicating ample demand; as a result, prices continue to be up an astounding 12.5 percent year-over-year. The days on the market (DOM) and the number of active listings need to go considerably closer to the levels they were before the epidemic, but we are not even close to reaching that point now.

Therefore, why do I assume that the property correction has already begun? Looking at the statistics for certain home markets, you may get a far more detailed picture of the situation.

Real Estate markets in Different Regions

People in this business often say that real estate is local. The most recent statistics on the housing market make this point quite clear.

To demonstrate the variations, let us look at some of the most successful companies to emerge from the most recent economic upturn: Boise, ID, and Asheville, NC.

Prices in the Boise home market increased by 59 percent between June 2019 and June 2022, making it one of the hottest property markets in the country during the last few years. Those are astounding increases, but Boise seems to be in danger of giving up some of those gains in the near future.

You should keep in mind that my premise is that the marketplaces at the most serious danger of experiencing a correction are the ones in which the number of active listings and the number of days on the market are close to the levels that existed before the epidemic. Active postings in Boise increased by 130 percent year-over-year and are now 8 percent higher than before the epidemic (which I calculate as June 2019 compared to June 2022)! There are quite a few markets in which this is the case, but Boise stands out among them all.

The DOM is now at a level that is 13% lower than it was before the epidemic, despite a year-over-year increase of 4%. But when you combine those two data points with a significant rise in the number of new listings and a significant rise in the number of price decreases, it seems to me that the housing market is undergoing some kind of change.

Does this suggest that there will be a significant decrease in costs in the Boise area? No. That is potential, but I believe a well-balanced market in which purchasers retain some degree of influence is more likely to occur. Even though this is just a smart estimate on my part, I do anticipate that we will see pricing decreases in Boise at some time in the next year or two, but I predict that any price decreases will likely just be in the single digits. I believe that purchasers will be able to negotiate, and as a result, better prices will become offered in areas such as Boise. This is something that I believe to be more definite.

In order to compare and contrast Boise with another recent boom town, let’s take a look at Asheville, which is located in the state of North Carolina.

More slowly than Boise, but still enormously, Asheville’s revaluation since the beginning of 2019 was 41% and has risen by over 20% in the last year.

But when we look at the leading indicators for Asheville, we see a very different narrative than we do for Boise. The number of active listings has decreased by 11 percent as compared to the same time last year. The number of days a home spends on the market has decreased by 8% year-over-year, while price reductions have increased by just 18% year-over-year. This indicates that the housing market is very solid, and it is doubtful that prices will see a significant shift in the near future. The power in this situation is with the dealers.

Looking at these two case studies, it is clear that various housing markets are moving differently. For this explanation, I chose two popular and well-known hot marketplaces; nonetheless, you will find that similar variations are prevalent everywhere. Reno, Austin, and Phoenix give off the impression that they are transitioning. However, Miami, Richmond, and Tallahassee still give the impression that they are strong seller marketplaces.

Conclusion

The property market is still performing very well on a nationwide scale. Prices have increased by double digits compared to the previous year, inventory is beginning to move up, but the number of days a property spends on the market continues to be extremely low.

However, if you know how to read between the lines and take a close look at a number of trustworthy lead factors for the property market, you can see how it is experiencing change. The market is shifting away from the iron grip that sellers have had on it, and the power is changing back to the consumers. Buyers of homes and investors in real estate are in a good situation to negotiate and discover deals.

These changes in tendencies are even more obvious when seen from a more regional perspective. Some markets seem to be rather robust and are likely to continue expanding (although at a more moderate rate), while others appear to be on the verge of seeing price corrections in the coming weeks. You must understand the market in your area if you want to be a smart investor. The number of days a property has been on the market, in addition to the number of current listings (or other inventory metrics), is the data that I consider to be of the utmost importance. You can find those in your location by searching Google, or you can download my spreadsheet and use it to compare the statistics for June 2022 to those for June 2021 and June 2019 for hundreds of different marketplaces.

It is important to keep in mind that the statistics I will be discussing here serve as leading indications of the short-term prospects of the city under consideration. You must study macroeconomic indicators like population increase, income growth, and construction to understand the long-term picture.

A mortgage with a fixed interest rate for the first thirty years of the loan’s term is one of the most helpful financial instruments available to investors in rental property in the United States. Interestingly, this kind of loan differs from what is generally available in other nations. Most nations provide loans with flexible, fluctuating, variable, or renegotiable interest rates. Each of these types of mortgages has an element of risk since there is always the potential that the interest rate will increase unexpectedly while the owner is in possession of the property.

Fixed-rate mortgages are not only helpful to investors because they enable them to avoid potential rate increases in the future, but they also provide other advantages. However, there have been significant periods of time during which the rates of interest on these loans have been astonishingly low. As a result, the cost of borrowing money has been remarkably little at these times.

It remains to be seen what will happen if interest rates rise above what we are familiar with. The monthly payments for our mortgage have all of a sudden been significantly increased, which has a negative impact on our cash flow returns. What does this indicate for my decision to continue investing in rental properties? Should I cut down or quit altogether? What steps can you take to ensure that you continue to generate a profit from your rental property even if your interest rates on your mortgage continue to rise?

The most effective technique to conclude this issue is to understand the financial potential of rental properties. The aspects of a rental property and its profitability that are within your ability to influence, as well as understanding what to search for in a possible rental property, may help you position yourself for the highest possibility of profitable returns, despite the increased monthly mortgage payment.

Investing in rental properties is a long-term plan

One of the most important things to keep in mind about rental properties is that they are, in reality, assets with a long-term horizon. Certainly, some individuals may see a rapid equity profit via renovations or value-adds, and others may find transactions with big cash flow from the beginning. However, most people do not experience either of these outcomes. However, it is important to keep in mind that, on average, rental properties bring in the most money throughout an investment’s life.

When doing a financial analysis of a rental property, we often focus on the cash flow statistic immediately in front of us. It’s easy to overlook that today’s expected cash flow is only a forecast. This figure does not consider factors like rent increases over time (while maintaining a steady mortgage payment), value, demand, or inflation. There will be consistent changes in each of those elements, which we anticipate will be improvements.

An overview of how renting a property generates income.

Before you learned about real estate investment, you may have been aware that rental properties can be quite valuable, but you might not have fully understood precisely how they might be so successful.

There are five different strategies by that rental properties might generate income, and they are as follows:

1. Appreciation
2. Cash flow
3. Equity built via mortgage paydown
4. Hedging against inflation
5. Tax benefits

When you deeply understand the particulars of each of these profit centers, you will not only be in a better position to appreciate the potential benefits of keeping a rental property for the long term rather than the short term. However, you will also start to understand that the cost of a rate of interest that is a few points more than what you are used to probably does not even come close to competing with the potential profit that may be made from the rental property over its entire lifespan.

You may already think, “However, these other revenue centers are risky, cash flow is still crucial, and the greater mortgage expenditure raises my risk by decreasing cash flow.” Yes, and there is a good chance that’s the situation. However, there are two things that you should focus on doing in this situation:

1. Understand how to manage the profit centers. If you are seeing a drop in cash flow, which is normal when the interest rate is increased, you could look for additional profit centers that have undiscovered potential. You may be purchased in an area now experiencing gentrification and seeing strong demand; if this is the case, you might assume that the potential for appreciation is quite high. Or maybe you are making investments at a period of very high inflation. In such a situation, what options do you have? Imagine this as a bar graph, with a separate bar representing each profit center. If one has a problem, do any of the others still work? If every single one is out, we have a problem. If some are more than normal, do the others compensate? All of this is dependent on your specific scenario.
2. Pay close attention to location and demand. In the same way as with that particular example, one of the secrets is to make investments in real estate that will specifically give their hand to the appreciation bar, in addition to inflation and rent demand. As long as there is demand for the real estate that the proprietors own, the potential for financial gain generated by the profit centers will be much higher, and they will continue to expand in scope over time.

When you understand how income is generated from rental homes, you can switch from thinking of yourself as a consumer to thinking of yourself as an investor. Those are led to believe that higher interest rates are deal-breakers because they are wearing the consumer hat. However, people who actually grasp how rental property earn will not only come to see how to see beyond the interest rates but will also provide them insights on how to pay for it.

Increasing rent

As was previously said, the expected cash flow of a rental property is calculated based on the rentals received today, not those collected tomorrow. There are two main drivers behind rent increases: appreciation and inflation.

Try to guess what does not rise with time and is unaffected by changes in the currency’s value or the appreciation of its value. A fixed-rate mortgage payment is exactly what you’d expect it to be.

This indicates that your cash flow spread will continue to expand throughout the life of your rental property, provided that you continue to raise the rentals.

Your costs, like property tax and insurance, could go up over time, but it’s doubtful that they’ll increase at a pace that matches what rentals will do. In general, you’ll see that rentals will continue to draw farther and further away from your fixed-rate mortgage expenditure, and your earnings should expand exponentially. This is a good sign.

Increasing Profitability and Minimize Expenses

Although I’ve been focusing on the long term, proactive steps can be taken to generate greater wealth in a shorter amount of time. Let’s go through each one of them.

Increasing the value of the house

Your home will earn more worth and attract a greater level of demand the more appealing it is. You can add things to your property to improve the attractiveness and drive those profit gains to occur more rapidly. While many revenue centers will kick in on their own over time, raising the value of a property and the rentals, you can also enhance desirability by doing things.

Rehabilitating an older home or building is the primary technique for boosting the value of a property. You raise the total worth of a property by improving it so that it is nicer and more appealing to potential tenants, and you also give yourself the opportunity to ask for higher rents on that property. You are not really increasing your earnings; rather, you are just accelerating them beyond the point when the rise in interest rates is costing you.

Mortgage refinancing

You should keep in mind that the higher interest rate you’re paying now may not remain the case indefinitely. Mortgage interest rates are open to a similar range of motion as property prices and rental rates. You can re-finance the home at the new, lower interest rate if the interest rate falls below the one you were initially committed to paying. Obviously, there is no assurance that the interest rates will decline, but if they ever do, you will be able to implement this change and see an improvement in your company’s cash flow.

Choosing a suitable place

If you’ve been paying attention, you’ll have realized that the topic of discussing the location of a rental property isn’t new. You may make even smarter decisions when you understand how to assess neighborhoods and select locations with an incredibly high likelihood of appreciation. This is similar to what was said before about purchasing in a demanding route to assure profitability ratio. Values might go up due to changes brought about by gentrification, population expansion, and job growth.

However, as with any other appreciation, relying on gentrification is speculative at its core. You should not only educate yourself on how to recognize neighborhoods that may undergo gentrification, but you should also prepare a backup plan if gentrification does not occur in the neighborhood in question. You shouldn’t put all of your financial security on a single profit center since there is always the possibility that it might collapse. Nevertheless, gentrification may result in increased profits; however, this is contingent on the buyer making their purchase at the optimal time, which sometimes necessitates acting swiftly and avoiding excessive hesitation lest they miss out on the opportunity.

Overcoming Inflationary Pressures

Even though inflation generally negatively influences most aspects of our life, there is one area in which it might be beneficial: the rental market. Regardless of what happens to the dollar’s value over the loan term, your monthly expenditure for the fixed-rate mortgage will remain the same. You have to make the payment in the same currency as the loan, not the currency of the day after tomorrow.

Inflation against mortgage interest rates is a good comparison point. As a result of inflation, the cost of purchasing an identical home with cash in today’s dollars would be more than the cost of paying the mortgage interest on a 30-year fixed mortgage throughout the loan’s duration. This is the perspective of many industry professionals.

As long as inflation rises quicker than the interest rate on your mortgage, you’ll continue to make more money than you’re spending.

The Basics to Remember

If you read this post, it would be simple to conclude that if you keep a rental property for a very long time, you will make a lot of money off it. This would be the case, although your current costs may be more than they were in the past since eventually, everything will catch up and turn into a profit.

This is not going to be the case with all of the houses. There is no assurance that any investment in rental property will result in a profit, and various circumstances might undermine certain profit areas. It is also crucial to keep in mind that conjecture does not always play out, and the best course of action is to steer clear of speculation as much as possible.

This article’s objective is not to deceive you into believing that any property can be turned into a lucrative investment. Rather, the purpose of this piece is to demonstrate how to look at and evaluate possible rental properties while keeping in mind that a higher interest rate won’t consume as much of your income as you would believe it will.

Having a good education is also very significant. For example, a rate of interest that you consider exorbitant could be considered “average.” We have become used to the sight of interest rates that are at historically low levels. Because of our privileged background, we are under the mistaken impression that the only way for us to make a profit on our mortgages is if the interest rate is exceptionally low.

Last but not least, if the interest rate continues to be a source of concern for you, you can consider making a larger initial payment on the loan so your monthly payment can be lowered. In addition, if you make a larger down payment, you can be eligible for a lower interest rate.

If you’ve made investments when interest rates were higher, what was the most innovative financing arrangement you employed on your rental properties during those times, and how did it play out 10 or 20 years after you owned your property?

Financing for Rental Property Investing

New City Financial has over 10 years of Rental Property Investing mortgage lending and Rental Property Financing as well refinance options to help you grow your rental property investment portfolio. Contact us if your looking for a Rental Property Mortgage Loan or Commercial Property Refinance. You can also call them at (855) 848-2862.