Are the bulls running or are the bears coming? Any business media you pick up is harping on the idea of a “recession watch” and the economy is basically coming to an end! On the flip side my proprietary lending data is giving me a radically different answer. What am I looking at that predicted the last recession? Am I correct or is the mainstream media? What does this mean for real estate?
First as a side note, the media cycle is running at warp speed with tariffs, treasury prices, the stock market, etc.. all over the place so it is difficult to actually discern where we are heading. With that said, the data through our April collections is still pointing in the same direction.
What indicator do I look at to predict a correction/recession?
We are unique in that we hold and service our entire portfolio and also do some contract servicing for others. Fairview is privately held and therefore we don’t report any data publicly. This gives me an unbiased opportunity to see how our portfolio is performing. This unique view affords me a totally different perspective than what the media is looking at. I focus on lates, 30 days in particular. How many borrowers are missing a payment for 30 days or more for whatever reason. We have a large enough portfolio spread out in 3 key markets, Georgia, Colorado, and Florida. Between these three markets we get a good snapshot of what is going on in the general economy.
What happened in 2008 leading up to the big correction?
One of the key learnings out of the last recession is that we totally missed the indicators the predicted the last crash. After the dust settled I went back to my portfolio and started looking at different metrics to see if I could have predicted the drop. The numbers jumped out of the page, about 6-9 months before the last crash, we saw a profound increase in lates, it started small with 5% or 10% increases then it quickly snowballed until it hit a crescendo and we were in the thick of the drop.
What is my recession indicator showing today?
I look monthly very closely at our lates, we look at it both in dollar amount and number of 30 day lates. Ironically around last June, I was pretty convinced we were heading into shaky waters. All of the sudden our 30 day lates jumped in one month 15%. Ironically a few months later, the lates came exactly back into the long term trend and quickly declined. It was a false alarm. Since then, my recession indicator has been almost eerily quite with no major movements between months. Ironically the last 60 days our lates have been declining below our 12 month average pointing to an improvement in on time payments!
Is my recession indicator still valid?
It is a valid question, is my recession indicator that predicted 2008 still valid? Ironically I’ve had this same conversation with a handful of bankers that I know to get their thoughts and the consensus is that it should still be valid even with all the changes in the economy. As a hard money lender, our borrowers will still likely show the stress of a hiccup in the economy before the broader economy. Note, the current situation we are in is unprecedented in that it is a “manufactured” crisis regarding tariffs so if this is not resolved quickly, all bets are off.
Still big risks that could derail my recession indicator
Although I think my recession indicator is still valid to predict the next recession, there are still major risks that could quickly change the dynamics in the economy.
- Everyone continues to harp on tariffs: I’m hopeful that the Tariff situation is quickly worked out as my base case. Essentially the administration has around 90 days to figure this out before the impacts are long lasting. Tariffs are now a big wild card but my gut says they will be resolved without too much harm to the economy.
- Government spending: This is a top risk now and into the future. As government spending remains at record levels, interest rates will remain high and hold the federal reserve hostage on rates which ultimately could lead to something breaking in the economy.
- Stock Market: There is a ton of speculation in the stock market and it is historically overvalued based on any long term metric. There could always be a contagion effect where big market losses lead to a reset somewhere else in the economy.
- Commercial Real estate: The market still is sticking its head in the sand on commercial real estate values. Look for many office properties in major cities to have huge resets. For example in Denver I have seen properties trading for 25 cents on the dollar meaning these properties have lost over 75% of their value.
Is a recession on the horizon
The million dollar question is will there be a recession? I can say with certainty yes there will be a recession, but the recession might not occur for another 6 months or 2 years or even longer. It is like asking will it rain, yes it will rain, but will it rain tomorrow is a much different answer. To answer the more direct question, will there be a recession in the next 6 months, I would put my probability of an impactful recession at less than 30%. The big caveat here is that the tariff situation must be worked out in the next 90 days. If the administration makes a big miscalculation and does not come to terms on tariffs then all bets are off and the probability would jump substantially.
The factors above including the stock market, Government spending, and commercial real estate could absolutely derail my predictions, but based on my recession indicator we are well over 6 months away. But as mentioned above, eventually it will rain, just very unlikely to rain tomorrow. In the meantime, enjoy the nice spring weather for now, but you need to be cognizant that the predictions can change rapidly as we are in interesting times that have been primarily driven by crazy government spending.
Rest assured, If I see any big changes in my recession indicator, I’ll post an updated blog. The big caveat is that we are in an era where a big shock could occur to the economy so we might all find out at the same time when we end up in the next recession as no early warning indicators can pick up the velocity of the trade war, stock slump, etc… but based on my information as of today, I don’t foresee a cliff drop in the next 6 months!
Additional Reading/Resources:
- https://www.fairviewlending.com/why-are-commercial-real-estate-prices-falling/
- https://www.fairviewlending.com/will-mortgage-rates-stay-higher-forever/
- https://www.fairviewlending.com/upper-income-spending-drops-what-does-this-mean-for-real-estate/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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