🐀 Westley, What About The R.O.U.S.s (Recessions of Unusual Size)? 📉

Welcome to another addition of Real Estate Gone Wild, and this time we’re going bigger… real big… like Rodents of Unusual Size big. Hopefully I’ve got a few Princess Bride fans out there because I want to talk a little bit about the macro economy and all the hub hub about recessions. It’s a buzzword right now and people want to know what that means for real estate - specifically real estate here in Reno. Real estate doesn’t live in a vacuum and it’s affected by the broader economic environment so let’s get a little macro.

Right now the macro-economy has a lot of folks scratching their heads. The yield curve has been inverted for quite awhile now (meaning short-term treasury bonds are selling for more than long-term treasury bonds). It’s one of the most consistently accurate indicators that we will likely go into recession. It’s the market basically saying “I’m scared about the future.”

However… We've already had a lot of inflated assets let off steam since COVID such as SPACs, crypto, and real estate. Most of the other market indicators aside from the yield curve are mixed so it’s really not that cut and dry that something is going to give.

If there is something that’s going to give it might be all the poor regional banks which are getting repeatedly kicked in the shins and are trading like meme stocks with lots of traders trying to short the stock and others trying to pump them. Regardless, many are in a precarious position of being undercapitalized and at risk.

And yet, at the national level residential real estate seems pretty stable. Price let off quite a bit in some markets, specifically the mountain west region in the latter half of 2022. However, it’s already rebounded pretty strongly. Lenders’ loans are healthy as are owners’ equity positions.

Our local market here in Reno is no exception to this either. We’re still down about 9% year over year from 2022 but when you take into account that most buyers are paying 40%+ more on their monthly payment, that’s pretty wild. That’s a huge increase in cost but not a huge decrease in demand.

Our amount of active inventory remains really low, even lower than this time last year when the market was still moving at a really fast clip. We have only 1.6 months supply of inventory currently available. For reference, less than 3 months is considered a seller’s market. That basically means that selling property is mashed potatoes right now. As long as you price it appropriately, you can’t screw it up. Boil water, pour in the bag, and you’re done.

Apparently you don’t even have to boil it.

“But!” (you say) “What if if we go into a bigger recession? What happens to real estate prices then?” Well, ignoring 2008 because that recession was caused by real estate, historically residential real estate usually does pretty well during recessions. It’s considered to be a lower risk asset class than stocks so investors like it as a safe harbor. In addition, it’s a life necessity. As opposed to other financial assets that people exclusively buy for a return, people buy real estate because they need housing. That means that even in recessions lots of sales are happening and real estate is exchanging hands.

In conclusion, recessions can come in a lot of different shapes and sizes. Currently we have some indicators suggesting we will have (or are already in) a recession, but overall it’s pretty mixed. There is definitely some risk with regional banks and commercial real estate (which I’ll discuss another day), but in spite of that residential real estate remains healthy, resilient and robust for now. I think the underlying shortage of residential real estate supply is the prevailing force influencing price more than rates or other current macroeconomic trends, and for that reason I think real estate buyers, sellers, and investors should be cautiously optimistic towards this market and put more weight into the supply shortage narrative than the recession concerns when making real estate decisions.