A growing chorus of economists predicting the U.S. economy will enter recession territory in the next two years, coupled with signs of a cooling housing market, may have many in the real estate industry wondering if they should batten down the hatches in preparation for a possible downturn.
ATTOM Data Solutions surveyed industry leaders in six real estate verticals to find out what steps they’re taking—if any—to prepare for a possible recession. Here’s a closer look at how experts in each of the real estate verticals we surveyed are preparing for a possible recession.
Marketing and Lead Generation: Cushioning the Impact
“The way that we look at it is, the majority of our customer base is in the nonprofit industry; nonprofits tend to be recession-proof,” says Arup Banerjee, CEO at Windfall Data, a company that helps nonprofits identify, understand and engage affluent customers using property equity data paired with other household-level data.
Banerjee cited statistics showing that dollar volume of donations to nonprofits has increased every year with three exceptions, all during recessions: 1987, 2008 and 2009.
Windfall has helped its customers handle another challenge in recent years: a shrinking share of donations coming from corporations, forcing nonprofits to rely more on individual donations. Banerjee believes nonprofits—and his company—can learn from that experience should a recession hit.
“We can be used to make sure that the impact is felt at a lower or lesser degree, which is important for nonprofits that are trying to identify high-net worth individuals who are still giving during a time of financial distress,” he says. “Similar to how we’ve helped nonprofits weather the storm with (shrinking) donations from corporations, we’ll help them weather (a recession).”
Mortgage: A Recession Silver Lining
Tendayi Kapfidze, chief economist at LendingTree, argues that a recession could benefit the mortgage industry.
“Most discussions around a possible recession in 2020 center around a decline in government stimulus combined with a long expansion, suggesting the economy will need to rebalance,” he says. “It’s important to note that such a recession would not resemble the financial crisis-induced recession at the end of the last decade. It would likely be a milder downturn similar to that in 1990 – 1991 or 2001.”
If the predicted 2020 recession follows the patterns of those earlier recessions, rather than the 2007 – 2009 recession, Kapfidze argues it would likely result in a rebound in refinance originations, which have dropped in the last two quarters as mortgage rates have risen.
“During those recessions, the 10-year treasury had peak-to-trough declines of 80 to 120 bps,” Kapfidze explains. “This is where it gets interesting for the mortgage industry. A rate decline would trigger a mini-refi boom that would address many of the challenges the industry currently faces due to the decline in refinance volume. Thus, the net result could actually be an increase in mortgage originations as happened in 2001.”
LendingTree is not depending solely on a possible refi boom triggered by the next recession to recession-proof its business. Its recent diversification, along with its strong lead generation chops, provide additional insulation against cooling mortgage demand, according to Kapfidze.
“We’ve added marketplaces for personal loans, credit cards, auto loans, student loans, small business loans, reverse mortgages, deposit products and credit services,” he says. “Additionally, our business model can operate efficiently in a rising rate environment, when lenders have difficulty in bringing in organic volume themselves. That’s when they’ll come to LendingTree to fill their pipeline, and we can market into that demand, or pull back if the unit economics don’t make financial sense.”
Real Estate Brokers: Managing Ebbs and Flows
Longtime real estate brokerages such as Long & Foster have plenty of experience in weathering previous recessions, giving them confidence for dealing with future recessions, according to CEO and President Jeff Detwiler.
“Having been in business since 1968, we have lived through other downturns, and we have learned to operate our company effectively in the market’s ebbs and flows,” he says. “As we have always done, we are maintaining our focus on our core business areas: real estate, mortgage, settlement, insurance, property management and vacation rentals.”
Long & Foster is not just taking a defensive posture when it comes to recession-proofing its business, according to Detwiler. The company is also going on the offensive to stay in-step with changing realities of the marketplace.
“We are identifying strategic investments that align with changing consumer and agent needs,” he says. “Those opportunities range from investing in technology to allow our associates to work with their clients from anywhere to rationalizing our total retail square footage.”
Real Estate Investors: Gaining Marketshare
Southern California real estate investor, author and trainer Bruce Norris is making some modest defensive and offensive moves to shore up his business against a recession, which he believes is coming in late 2019 or early 2020.
“The biggest change in our business model will be suggesting California investors move some of their equity positions to Florida,” says Norris. “That move will increase their cash flow greatly and improve the quality of the inventory they hold.”
Greg Rand, CEO of OwnAmerica, says that the investor niche his company operates in—single family rentals (SFR)—will benefit even if home prices do take a hit.
“Remember that SFR is different than housing overall. When the market is strong, investors and consumers are confident, and prices rise. Investors win on appreciation,” he explains. “When the market is weak, homeownership declines and renter demand increases. Investors win on yield. SFR is a two-sided coin because every house has two uses: owner-occupied or tenant-occupied/investor owned. No other commercial asset class gives owners two demand drivers and two exit strategies.
“Some people will say I view this through rose-colored glasses,” Rand adds. “They are welcome to duck and cover for the impending recession. We intend to put the pedal down and gain marketshare.”
Settlement Services: Recession-Proofing Required
The settlement services industry is not well-positioned to weather a recession, according to Patrick Stone, executive chairman and founder of Williston Financial Group (WFG), a company that operates several businesses in the title insurance and real estate settlement industry.
“The impact on WFG, and the settlement services industry in general, will be a shrinking market with fewer available transactions and clients more focused on two basic concerns: cost and the quality of service,” he says, noting that he does agree with Norris and others that the larger real estate market will not be as negatively impacted as it was during the last recession. “However, the recession will accelerate the consolidation trend that has already started in the settlement industry.”
To prepare for that consolidation trend, WFG is actively implementing three specific initiatives to increase efficiency in its business, according to Stone.
“WFG has accelerated its efforts to finish migration to a single operating platform, consolidation of its title production capabilities and implementation of its integration platform (WESTVM) with as many lenders as possible,” he says. “Finishing these three initiatives will allow for WFG to consolidate order entry and post-closing functions, maximize production efficiencies and eliminate as much rekeying of data as possible.”
Insurance Services: Fixed to Variable Costs
A recession could most obviously benefit companies like DIMONT that provide insurance claims services to mortgage servicers to help protect the property collateral behind mortgages against natural disasters and default.
“We would expect defaults to go up in a recession, and so we would expect our volumes to go up dramatically,” says Denis Brosnan, CEO of DIMONT. “It’s a significantly positive thing for volumes to grow…DIMONT did very well in the early stages of the last recession.”
In the meantime, mortgage foreclosure volumes are hovering at historically low levels.
“Today, we’re still the largest of our kind, and our clients are really outsourcing a very niche type of process,” says Brosnan, referring to the insurance claims process. “Employees are hard to find, they’re expensive…outsourcing works because they are converting fixed costs to variable.”
DIMONT is also encouraging its mortgage servicing clients to look ahead to the next recession, whenever that may be, and to put into place efficiencies that will quickly multiply into mammoth savings should default volumes spike. One practical example, according to Brosnan, is to implement efficiencies learned by lenders during the last recession.
“Maybe those are tactics and toolsets that prime lenders didn’t think were necessary given their lower delinquency rates…now is the time to consider those tools, because in a recessionary environment, the costs you could save with these is tremendous—in the millions of dollars.”
Cause, Blame, Impact
Most of the experts interviewed argued that real estate is well-positioned to withstand a recession in the next two years—even those like WFG’s Stone who believe a recession is likely.
“Unlike the last downturn, real estate won’t be the cause or take the blame, and the impact on real estate will be much less severe,” he says. “Most markets will not see a downturn in prices, but will witness a noticeable drop in volume.”
Several experts suggest that a recession could even benefit the housing market.
“An economic slowdown, as predicted by many industry analysts, could bring a more balanced market and ease housing demand,” says Detwiler of Long & Foster.
“In the housing market, a recession would temper demand somewhat, but the housing sector would likely experience a milder version of the recession than the rest of the economy,” Kapfidze says. “The key characteristic of the current housing market is a lack of inventory, thus, the housing sector lacks a catalyst for correction, and it is possible it will not be in recession along with the rest of the economy. Finally, a slowdown in momentum in the economy could dampen the rate of house price increases, which would improve affordability for many potential homebuyers.”
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