Nobody panic! Recessions are a normal part of every economic cycle. But don't just passively wait for it, be prepared! Regardless of timing, it’s not a matter of “if”, it’s a matter of “when”. Don't let recency bias lead you to believe this recession
is going to be as bad as our last one. It won't be.
Your Uncle will tell you recessions don't occur during an election year, and he may be right. But this time it’s different. The US broke the record for longest economic expansion in July 2019, but at some point, the music will stop. Whether it’s 2020
or 2021, most economists believe our next recession will be triggered by global trade policy, followed by stock market volatility, capped off with a geopolitical crisis. That doesn’t sound like a good time!
Heading into our last recession in October 2007 the target FED Funds rate was 4.5% versus 1.5% in October of 2019. This means, should the FED need to loosen monetary policy to stabilize economic activity or the stock market, they don’t have nearly the
fire power they had in 2007. In fact, interest rates around the globe are lower across the yield curve, much lower. Economist are keeping a close eye on global manufacturing data to gauge the timing and severity of the next pull back.
Data from Thomson Reuters Datastream
So, what will trigger our next recession? Likely not the real estate market. Since the Great Recession, lenders have tightened up lending practices, so it takes more than fogging a mirror to get a $500,000 loan. We are not seeing many homeowners taking
on home equity lines of credit to buy matching his/her Cadillac Escalades (yes, I saw this happen in 2006). Bank statement loans still exist, but most lenders are requiring 20% down to hedge their risk of default. The real estate market will feel
the impact of our next recession, but there is still a lot of liquidity standing by to capitalize on opportunities when they arise.
The bottom line. Be ready and have realistic expectations. Remember, real estate values historically increase around a 4% year over year, not 8%. Be sure your emergency reserves are healthy and don’t over leverage your budget. Take a look at your
investment portfolio to ensure it mirrors your time horizon and risk tolerance. If I'm wrong, even better!