Should I Invest Now or Wait?

One of the most common things I hear from investors nowadays is, "I think I'm going to wait for a recession before purchasing."  

What always surprises me is that no matter an investors experience/skill level, this is an amazingly pervasive sentiment. While on the surface I think this logic is valid and totally understandable, I think digging into the numbers a little shows that this might not be the best decision. With that said, let's go deeper on the topic and figure out what you might be missing if you agree with this idea! 

Housing and The Great Recession

Let's address the elephant in the room upfront - The Great Recession. This is a massively important issue to discuss when it comes to this topic, because I think it's almost entirely the driving cause for the "wait until recession" sentiment. And, let's be honest, that makes perfect sense! So many people lost their shirts during The Great Recession, whether they were investors or run-of-the-mill homeowners. Some markets weathered the storm fairly well, Denver being one of those, where median home price only fell about 10% from 2008-2010. However, some markets were absolutely crushed, liked Phoenix, where median home prices fell nearly 50% during the same period! Most markets fell somewhere in between, but that's a pretty bad place to be between all things considered.

The housing market decline was front page and front-of-mind for many years during this time period, and I think this has given us an extremely skewed view of the economics of the housing market. At the end of the day, we're all human. As much as we want to believe we're logical, rational actors in any marketplace, we're far from that. We're emotional, impatient, and susceptible to biases that most of us don't even understand. More than anything, I think human nature has driven us to a place where most people think, "I'm going to wait until a recession happens so I can get deals 15% off." However, if we take a step back and remove ourselves from the emotional side of us that is driving that decision, I think it will become apparent that our logic is once again flawed - misguided by our emotions that want us to make more dollars faster and easier. 

Housing in a Not-So Great Recession

If we're all skewed by our experiences during The Great Recession, should we accept this as the default outcome for the housing market? Of course not! We should peel back some layers on the subject. We should look back at multiple recessions and see if this is the norm or if this is the exception. 

To get a rough idea of what happens in the housing market during a recession, we'll examine a select number of years that the U.S. economy was in recession (1980, 1981-82, 1990-91, 2001, and our favorite 2008-09), and examine FRED data on house prices. Here's the chart we'll be using for our analysis: 

It's a little difficult to see, but FRED actually helped us out here by placing the grey columns during times of recessions. I think the first think our emotional, biased minds are drawn to is what we know best - The Great Recession. Based looking here alone, we probably feel validated. "Look! Prices plummeted during the recession in 08-09 - I know I should wait for a recession to buy my next property!" However, when we start to examine the graph further, what do we see? At worst, we see that prices flat line during a recession, and that really only (kind of) happened during the 1981-82 recession. Outside of that, house prices actually rose during all recessions! Think about that. Even when the economy slows down the housing market keeps pressing forward! Without this graph as a visual aid, I don't think anyone would believe what we just found, and this is our emotional, irrational human mind at play. 

The Truth of the Matter

At the heart of the real estate industry and the economics of the housing market is uniqueness - two houses are the same. Even two homes that are model matches are not truly identical, because they sit on different plots of land or occupy space in a different part of the building. This uniqueness quality is pervasive on a micro level and a macro level - are Denver and Phoenix that comparable of markets? In some ways yes, in many ways not at all. That said, the effects of a recession are dependent on your market, and in many ways your sub-market as well. When we say that the median home price in Denver dropped 10%, that means that half of home prices fell less than 10% and half fell more than 10%. The difference manifests itself in many different ways, but this really hammers the uniqueness point. The reason I highlight this fact is because in some markets or sub-markets, home prices will fall during a recessions, but as a whole, we've historically seen this to be untrue. If you're banking on this phenomenon you're really just adding another layer of prediction to your equation, which is something us humans are incredibly bad at doing.

Mob Mentality 

Even though it might seem like I'd tell you that you're making a grave mistake by waiting to invest until a recession, I promise I'm not. If you wait for a recession, you might be able to buy a property for 10% off, maybe more! However, if almost everyone has this same strategy, what do you think is a more likely scenario? Because the way I see it, when a recession does come (and it will) investors are going to flood the market. Now you have tons of investors competing against you for properties, and now your next investment that you've been waiting on has gone from 85% of its 2020 price to 95% of its 2020. 

I'm no economist, so my guess on when a recession will happen is as good as yours (or an economists, since their predictions are historically abysmal). But if you're waiting for the next recession to buy your next property and it doesn't come for another 3 years, you've just lost 3 years of cash flow, debt reduction, and above all, compounding appreciation! Depending on your market, this is almost certainly a greater economic value than the discount you'd get on a property you buy during a recession. 

Moving Forward

No matter when you decide to buy your next (or first) investment property, be sure to think deeply and work through all the pertinent information. Better yet, find someone you know that is an investor already and get their take - then do this multiple times. Heck, if you ever want to talk shop - whether you're in the Denver area or not - feel free to send me a DM!

Here's to your investment success!

-DH