Will the real estate market collapse?

Short answer, no. It helps to understand that an economic recession isn’t necessarily tied a real estate price collapse and why it happened last time.

2. The Great Recession was caused by the housing market and subprime loans

After the great recession, several new regulations were passed in the Dodd-Frank act that severely capped the amount of loans being distributed, increased the scrutiny behind mortgage origination (they actually check you make income now), and jacked up the disclaimers and limits to getting lending (this is why closings have 100 pages to sign now).

Even in a "no doc" loan, lenders still check to make sure that rental income supports a healthy margin vs the debt service.

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3. Subprime Loans meant several years of overbuilding

We are at an all time deficit for supply. The 08-09 crisis started in 2001 when interest rates were reduced to improve the economy. This led to 6 years of run way and a glut of supply that sank the market.

Low interest rates have only had 2 years to build supply, and although we’re at a new high for building permits, it is still lower that what we had leading up to the great recession because we fell into a major deficit following the 08-09’ period.

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4. Ok, but home prices went up by a lot in a short amount of time, doesn’t that mean they should come down?

It helps to understand why prices went up and what what would make them come down. People sell homes when can’t afford to hold on to them any more. So why do people sell homes?

Their income doesn’t support the mortgages (this one was particularly what led to subprime loan default)
The rent doesn’t support the mortgages (cashflow is king and rent has never universally fallen)

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Home prices are up, but so are incomes and rent. Austin has several new 6 figure jobs being minted every day, rent is up 25% in Jacksonville, FL in the last year. The American South and Southeast are likely to maintain that momentum due to COVID changes in migration patterns.

However, 6 figure incomes are leaving SF and NY. Those cities aren’t likely to collapse in valuations, but it does limit their ability for future growth.

The reason real estate is so resistant is that downturns are often less than 1 year. If the asset can support itself through an income, then why would owners decide to sell?

Risks Based on Asset Type

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SFH vs Multifamily Properties

<aside> 💡 Rental Market Stresses: Impacts of the Great Recession on Affordability and Multifamily Lending

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Both get hurt, but there is a 3-4 quarter delay for the dip after SFH started to fall

Multifamily Commercial Loans Securities defaulted at a higher rate than SFH

There was this popular strategy to take multifamily and convert them to condos for a premium once SFH prices exploded. This made sense for luxury apartments, but they were no longer valued based on rental income but the possible valuation once converted as converted middle market apartments.

Risks Based on Asset Class

Class A Properties vs Class C Properties

Class A properties recover faster from recessions, but appreciate slower

This is useful if you have 35%+ down and want to protect yourself against the downside
Lower cashflow, but if you’re ok with it, then this will be fine

Class C appreciates faster, but also falls harder (where discounts more likely to emerge)

Projects that

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Hotels. Hotels offer a unique prospect because room rates are adjustable to meet market demands. Note that the economy—especially during recessions—can greatly impact the hotel industry thereby minimizing your return on investment.
Mobile home parks. As far as commercial property types, mobile home parks are often overlooked, but can be profitable. After you buy the land, you lease out individual parcels to mobile home residents. Because you are only renting out the space and not the residential units, operating expenses and repairs tend to be minimal as does tenant turnover.
**Multifamily properties.** When listed as commercial, these properties include four or more units for living and can range from an apartment or duplex to a condominium or townhouse.
Office properties. This could be a single property for one tenant that is not meant for living, an office building designed to hold multiple tenants, or even a skyscraper.
Retail spaces. These could include something as large as a strip mall or something smaller and freestanding like a gas station or restaurant.
Self-storage facilities. This type of property rents space to tenants, ranging from containers and lockers to rooms or even outdoor spaces designed for boats or RVs, on a long-term or month-to-month basis.