Get ready – it’s going to be a bumpy ride
A new article published this week in MSN Money on-line (“Welcome To The New Recession” by Anthony Mirhaydari, MSN Money, April 24, 2013) questions the underlying stability of the U.S. economy right now. Mr. Mirhaydari, a regular writer on stocks for MSN Money, makes a strong case for this instability. He cites that many indicators are pointing to very stormy weather for our economy in the near future. This will occur despite the stock market’s current robustness, as well as the Federal Reserve’s continuing to pump more money into the U.S. economy.
Mr. Mirhaydari makes his case clear and succinct: “But while the market suffers from Ben Bernanke’s reality distortion field, the situation on the ground is deteriorating quickly. Nearly 70% of the economic data points released over the past month have missed expectations, up from 53% two months ago and 35% three months ago. As a result, by some measures, the economy appears to have succumbed to a new recession, invalidating the theory that cheap money solves all problems and casting a pall over the market’s recent rise.”
Backing it all up…
He goes on to back up his conclusions with more recent information: “Just consider the economic data we’ve received so far this week. The Chicago Fed regional manufacturing index disappointed. Existing home sales disappointed. The Flash PMI manufacturing activity index disappointed. The Richmond Fed regional manufacturing index disappointed. New-home sales disappointed.”
The writer then goes on to reach some rather obvious deductions: “It wasn’t supposed to be this way. The fiscal cliff and sequestration battles are behind us. The Fed is pumping $85 billion a month into the bond market. The Bank of Japan just pledged to double its monetary base over the next two years. The Eurozone debt crisis is off the front pages. But as I’ve been saying for months, none of this addressed the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings. Or a slowdown in Asia, especially China. Or a deepening recession in Europe, which is now infecting Germany, as illustrated by its abysmal Flash PMI manufacturing activity report Tuesday. Or the fact Congress hasn’t finished its budget battles, with $2.5 trillion more or so in additional budget austerity needed over the next 10 years to stabilize the national debt.”
How these conclusions will affect property investing
I had previously written here at the beginning of this year that “I don’t believe Congress, in all its machinations on the fiscal cliff, will allow the full sequestration cuts to go through. The country would be placed in a very real jeopardy for a new recession if this were to occur, especially if there are major cuts to the defense budget, as well as social programs. If sequestration were to occur, the overall unemployment rate would zoom up in 2013 and beyond.”
So I was wrong – sue me…
We did get sequestration. Though Congress is trying to amend certain provisions as I write this article. Nevertheless, the market data indicated above proves out that we are heading towards a new, secondary recession. I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate. And cash flows on rental properties would commensurately increase as well.”
Time to repeat myself
Oh, how I hate it when I’m right…OK, I won’t gloat here. But again, my suggestions for residential property investing from earlier this year are still as much, if not more, valid now: “My best suggestion for property investors in the unlikely event of a Congressional meltdown and a descent into another recession, is to consider taking the properties you already own, and use the time to properly maintain and upgrade them in a downturned economy. Use the downturn to your advantage, and try to rebuild your weaker, or deferred maintenance properties. You’ll be able to address all necessary repairs, and/or increase their valuation by upgrading the properties. In so doing, you’ll also be able to increase the rents you charge on all your improved units.”
Obviously, this will put you in better shape to ride out any recession that is forthcoming – regardless of how deep it becomes. Your cash flows and profitability should increase as you beef up the attractiveness of your properties in a market that will see even more demand for rentals as people lose confidence in home buying.
One final note…
Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties. With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings. So in the event of a recession, look to revamp, refinance, increase your rent rolls and build cash flow on existing properties owned in 2013. And hold these properties in the short term until you see signs of a recovery.”
Can I get an amen, somebody?
photos courtesy of funagain.com, singaporepropertycycle.com.sg, worldpropertychannel.com, ehow.com, phlegmfatale.blogspot.com