Recession: A myth for low-end homebuyers? - Posted by Ron (MD)

Posted by JPiper on March 03, 2001 at 24:57:43:

Hi Ron:

Not only is the ?primary characteristic of a recession an economic slowdown?, that?s the definition of a recession. Slowdown means that someone will lose jobs…therefore unemployment rises. As things slow down and people lose jobs, confidence will ebb.

So your first point, ?don?t think consumer confidence is a major issue for my buyers? is probably incorrect. One group may lose confidence when the DJIA goes down and they lose part of their assets, another group may lose confidence when they read about the slow down that is beginning/spreading, a third group be oblivious to these happenings, but will lose confidence when they see people losing jobs, overtime is cut back, etc. To believe though that any particular group won?t lose confidence is probably a stretch.

I thought it was interesting to contemplate your point regarding unemployment. I think the fallacy in your thoughts is that if the labor force is comprised of 100 workers, not all 100 are potential homebuyers. Perhaps 10 are. So when the unemployment rate rises, the percentage of unemployed versus the numbers of potential homebuyers is much bigger than you have indicated.

Frankly, I think you just put a ?smiley face? on the concept of a recession. What is bound to happen to one extent or another in a recession is a kind of ?boiling out? of excesses that took place in the prior expansion. Certainly those that overextended themselves in the prior expansion may experience financial difficulties in a recession, particularly if they lose their job. This may increase the pool of sellers in your market?meaning that you may be able to make more deals.\

The flipside of that coin however is that there may be an increase in reluctance to make major commitments. For example, I deal in low end markets myself. In my area I?ve seen a sharp drop in responses to newspaper advertising for buyers. In fact, I?d say my response rate may be off 90% so far this year. In my market we?ve had a huge jump in energy costs. This cost at the low end, my market, is a large % of discretionary income. To believe that this guy who?s now being squeezed by energy costs is going to rush out and buy a house, a car, or a TV set, I think is believing in the tooth fairy. And I think my advertising reflects that.

At that, over the last few years, I?ve seen the quality of both buyers and renters in my market decline steadily. To the point where on that last ad I ran which brought reduced response, the people who did respond were even lower in quality than normal.

So if I were you and I were trying to resell my rehabs for cash, I would count on longer hold times, more money spent for advertising, perhaps the need to involve realtors, and perhaps the need to offer more inducements to get a deal done. So while you may have a bigger pool of potential deals, they will also be more difficult and costly to market.

I believe the game of selling rehabs for cash will slow significantly in a recession?.even at the lower ends. I think we?re all going to find that rules of the game now change?and that we?ll all have to play different games than we?ve been playing.


Recession: A myth for low-end homebuyers? - Posted by Ron (MD)

Posted by Ron (MD) on March 01, 2001 at 19:04:09:

I rehab houses in the $60k-$75k range. I’m thinking that a recession may be more of a help than a hindrance in my market.

(My fear is high interest rates. As long as interest rates are low enough to keep my buyers’ payments comparable with rent, I think I’ll be in good shape.)

Here’s my logic…I’d be interested in other viewpoints.

I think the primary characteristic of a recession is economic slowdown, which translates to higher unemployment and low consumer confidence.

First, I don’t think consumer confidence is a major issue for my buyers. They are typically low to low/middle class and I don’t think they spend much time worrying about the CPI, DJIA, or what the evening news talking heads have to say about the economy. The more educated, white-collar buyers are going to be getting nervous about the effect of a downturn on them and their job. I think my folks will just keep plugging away, grinding out a living.

(Don’t get me wrong, I don’t think my buyers’ jobs are not susceptible to a downturn, I just don’t think the buyers will be as tuned in to the greater risk.)

As for higher unemployment, I suspect this might help more than hurt. Let’s say that unemployment surges to 6% (from the current 4%). That means that of every 100 potential buyer/prospects, six will be out of work, rather than four. The flip side is that I will still have 94 out of 100 as potential buyers, rather than 96…hardly a plummet.

On the other hand, if unemployment increases from 4 to 6%, this increase of the relatively small pool of people in serious financial trouble is quite large (50%). This is likely to significantly increase the number of foreclosures available for me to buy.

Finally, I suspect that my competition (from other investors) will shrink because of the first factor: their consumer confidence will diminish, so they’ll be more nervous about plunking money down on an investment property.

So, what do you think…should I be hoping for a mild recession?

Ron Guy