As Recession Fears Build, What Should You Do?

May 15, 2022 Updated: May 15, 2022

Commentary

The entire investment world seems to be crashing except for good ol’ sticks and bricks on terra firma—real estate. Part of the paper and digital assets sell-off is related to the fear of an economic recession.

Though it’s an increasingly germane topic, recession prospects carry wide disagreement among experts. It’s still less controversial than mask mandates, cancel culture, or student debt forgiveness. So let’s tackle it.

Inflation keeps running hot, at an increase of 8.3 percent from a year ago. One could think that persistently high inflation readings mean that asset prices of inflation hedges like gold and cryptocurrency should soar.

But these markets are often forward-looking, just like stocks are. They don’t respond positively to inflation that is definitely occurring.

Instead, their prices are all shrinking faster than Lake Mead. It’s because they are responding to the Fed’s reaction to inflation. Namely, that’s more interest rate hikes and currency destruction. Too much of this could lead to a recession.

The S&P 500 had its worst first one-third of a year since 1939. The bitcoin price fell over Niagara Falls, at times down 60 percent from its high just six months ago.

Some major companies are concerned too. They sure aren’t sitting around, asking, “Where can we spend more money than we have to?”

Facebook’s parent company, Meta, introduced a hiring freeze across most of its engineering units. Amazon executives are worried that their warehouses are overstaffed. Uber said it’s being more careful about new hires. Carvana laid off 12 percent of its workforce last Tuesday.

Too much of this can make a recession a self-fulfilling prophecy. Some market experts believe that we’re already in a recession. Others see mixed signals and even positive signs.

Many employers are hiking wages to attract workers. Nationally, there are still twice as many open job positions as workers. That acts like a buffer against higher unemployment.

When stimulus savings run dry and the federal student loan repayment moratorium ends, many think workers will be compelled to snatch up those jobs.

What is a recession, anyway? It has nothing to do with glaciers and it’s not worries about my hairline. It’s two or more consecutive quarters of GDP contraction.

We’ve already got the first of two. Though some feel it was an aberration, there was a 1.4 percent contraction in Q1 of 2022.

You might know the joke about the difference between a recession and a depression. A recession is when your neighbor loses their job—a depression is when you lose yours.

From my view, the prospects of a recession this year are real, though not high. If one occurred, it would be mild. The unemployment rate began the year at 4.0 percent. It’s now near a half-century low of 3.6 percent. With all of these job openings, higher borrowing costs must first curtail the glut of open positions.

California homes for sales
A sign is posted in front of new homes for sale at Hamilton Cottages in Novato, Calif., on Sept. 24, 2020. (Justin Sullivan/Getty Images)

Where does this leave my favorite asset, real estate? It keeps plowing forward, seemingly unfazed from other market corrections. But it could stumble too. I like to cite history. Real estate is slower to respond to broader economic change than stocks are.

If it’s not my hairline, where should you really look for recession indications? Economists say that it’s a surge in unemployment. As a rule of thumb, an increase in the unemployment rate of 0.3 percent, on average over the previous three months, means that a recession will follow.

A broad economic recession won’t necessarily result in a real estate bear market either.

Thus far, higher mortgage interest rates have been no match for an astounding dearth of housing supply.

Higher rates essentially mean that, for example, there are only 20 qualified bidders for every home rather than 40 bidders for every home. That’s why house and rental apartment prices have stayed resilient.

But what if a sour labor market did pour over into real estate? How would that look? Well, there’s a reason that many regard carefully-selected real estate as the best risk-adjusted asset class.

Say that high unemployment took hold and it led to a recession. Worse, let’s say that, somehow, extreme market forces trumped the historic lack of housing supply. It even led to property price erosion this year. I believe that I’m playing out a really unlikely scenario now.

Then it seems reasonable that a $5 million trophy property could fall substantially in value. But when it comes to modestly-priced properties in stable or growing markets, how much can, say, a $300,000 property really shed in value?

There is some permanency with today’s new, higher, inflation-fueled replacement construction costs. Could it even fall to $275,000? It’s doubtful. That would be an 8.3 percent loss.

In investing, a “guarantee” is rare. But one thing is for sure. A dollar is a depreciating asset. This past year, inflation means that a dollar holder lost prosperity at today’s inflation rate, 8.3 percent. It’s a virtual guarantee that your dollar will be worth even less in one year.

You can’t even say that the latest meme coin is guaranteed to lose value like the dollar should. Though it’s prudent to keep some liquidity, it makes complete sense to banish excess dollars.

With recession fears, some investors are leery of going too far out on the risk curve with their investments. It’s a time where some could start asking themselves, “What am I doing with a $300,000 digital image of an ape?”

In an economic recession, the best places to be are in providing what people need—housing, food, and energy. These items are non-discretionary consumer essentials. Chances are, you have used all three of them today.

I discuss how to win with smart real estate investing weekly on the Get Rich Education podcast.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Keith Weinhold is the founder of GetRichEducation.com. He writes about real estate investing and hosts the weekly Get Rich Education podcast.