29 Mar The Great Recession: What We Learned and Lessons to Take into 2021
Unless you’ve been living under a rock, we’re all aware of the shaky state of our current economic climate. The economy has been in decline for nearly a year now, and as of June 2020, the United States has officially been in recession. After experiencing The Great Recession just over ten years ago, it can be easy to fear the worst.
Real estate was certainly not immune to the recession in 2008, nor is it now – but the more we can understand about past recessions, the better we can tackle the place of economic downturn we’re currently in. Let’s take a look at what we learned from 2008, and how we can prepare ourselves moving forward.
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What happened in 2008?
Well, it’s a loaded question – but the basis of the 2008 recession was largely in part to securities fraud and predatory lending. Mortgages were commonly deceitful about loan terms, banks gave out shady loans knowing the high risks involved, and fraud was widespread. With the strong presence of predatory behavior and fraudulent activity, the mortgage industry was bound to crash – and boy, did it.
In response to the mortgage industry collapse, the stock market crashed and the Dow Jones Industrial Average dropped over 50%. Widespread market panic ensued as word caught that the Lehman Brothers had filed for bankruptcy, and major government-backed mortgage companies such as Fannie Mae and Freddie Mac were taken over.
In a nutshell, The Great Recession was a result of poor banking policy in the housing market that eventually poisoned the economy as a whole.
What’s happening today?
Today’s recession is different from 2008 for many reasons, the primary reason being that the current recession is relatively intentional. Rather than an economic crash in response to poor business practices, our current economy is on slow-down in response to a global pandemic. Policymakers have responded to public health safety concerns by eliminating business, rather than ignoring fundamental economic lapses in judgement.
Here’s the difference between 2008 and 2020:
First and foremost, savings are more abundant in the U.S. today than they were in 2008. The personal savings rate is currently around 33%, which helps to keep household debt around 76% of GDP. Compared to the 100% of GDP consumer debt in 2008, our current state is a definite improvement.
While unemployment is currently higher than it was during the Great Recession, the circumstances are more hopeful. Job loss in 2008 was heavy in the areas of construction and manufacturing, while a majority of job loss in 2020 has been from the leisure and hospitality sectors. Entertainment and hospitality jobs can be easily replaced as the economy recovers – so while our current unemployment rate isn’t ideal, the recovery is expected to be swift.
Most anyone could get a home loan prior to 2008, even those with bad credit and no income. In fact, NINJA loans well above a home’s appraised value were generously doled out to low-income or jobless borrowers. Perhaps largely in part to the Great Recession, today’s lenders are much more conservative when financing by requiring good credit scores and a downpayment of at least 3% or more.
Another difference between the Great Recession and our current environment is who exactly the recession is impacting. The economic downturn of 2008 was largely in part to the mortgage market crashing, so homebuyers and homeowners were of the demographic most impacted, having been stuck with loans they couldn’t afford. Today’s economy places the stress on young renters who have recently found themselves unemployed, and thus unable to meet high rent prices.
Signs to Look Out For
We can anticipate the direction the real estate market (and eventually the economy) will move by being observant. Interest rates currently hover at all-time lows, which opens the opportunity to inexpensively finance real estate. Urban areas have declined in population due to high costs and low standards of living, and many young adults are moving to the suburbs and rural areas to embrace more affordable, higher-quality living. Income levels are trending downward over the last few years, which means the demand for quality housing at fair rents will only continue to rise.
Wrapping it Up
The best real estate investors are strapped in for a rollercoaster ride at any given time. While the United States seems to be confident in having taken the lessons learned from 2008 and avoiding repetition, there are many things single investors can do to better prepare for economic downturn.
In times where unemployment is spiking, hold off on unnecessary personal spending and focus on raising liquidity (or cash on hand). This also allows you to have money at your disposal should the right investment present itself to you. Take advantage of today’s all-time-low interest rates by refinancing into long-term loans with fixed rates. Last but not least, make sure your tenants are of the utmost priority during economic uncertainty by clearly communicating expectations and staying flexible.
While the economy is certainly in recession, avoid the rabbit hole of thinking we’ve created yet another 2008 nightmare. Remember, the Great Recession was a result of fraudulent activity and predatory lending behavior – our current economy is on an intentional shutdown due to health and safety concerns.
The early bird gets the worm, and in this case, it’s the real estate investor who plans ahead. Recessions are a time of economic uncertainty, but they also hold a lot of potential when it comes to investing – and if you’re prepared, you may even score an opportunity to buy at a great price and create income for years to come. Nobody likes to struggle, and anticipating the worst can be quite the bummer – but remember, the more you can plan ahead, the better off you will be later.
