Will the Bottom Fall Out of the Economy and Real Estate Again? No! It Will Not

Double dip recession? Second crash? Are we headed to economic oblivion? This is a question many are asking now. For lots of good reasons, the uncertainty right now is very palpable in the market place. For real estate investors this is an important question. While the good times are not about to roll, and tough times are likely to be with the economy for sometime to come, there is significant macro evidence does not support things coming crashing down. Let's explore the risks and consider why a crash is not eminent?

First, there are a lot of bad things going on in the U.S. economy and global economy right now. Some of the greatest items our there include:

• Several nations are in deep debt and struggling to bring the situation under control. The risk of their sovereign debt accounts falling into default or in the possibility that they will devalue their currency weighs heavily on the investment community.
• China is putting the breaks on its growth creating slowing demand for commodities and other products globally. India has been taking some of the same steps as well. These emerging economies have been engines for growth as nation's work to fight their way out of this mess.
• The American consumer has become hooked on savings and is likely to want to increase that position as time passes. This puts a damper on American consumption growth.
• Unemployment in the United States (and globally) is putting intense pressure on recovery spending growth.
• U.S. debt has burgeoned and must lead to higher taxes in the not too distant future.
• Businesses are setting on tons of cash weighting on clearer economic skies. This reserve is likely to grow and that isn't helping any either.
• The largest amount of foreclosures are still incomplete and will occur over the next 24 months.

Because of these items demand and growth is weakening and concerns of second recession is running high. Frankly, the potential for a second recession appears quite strong. However, a drop into negative growth may not point to a crash. In fact, in this case a crash is unlikely. The reasons for this include:

• Consumers are setting on steadily increasing amounts of savings;
• Businesses have amassed a huge war chest;
• Banks are quickly curing their reserve positions and signs of lending are showing;
• Threatened sovereign debt issues are being aggressively addressed and the patients are taking the medicine;
• Inventories are being maintained at low levels preventing further paring back; and
• The pro-longed low interest rate period the economy has experienced has allowed many companies to reduce their risk positions to extremely low levels.

Because of these factors, the likelihood is that growth is tepid and perhaps may shrink very modestly. This will cause a shift but not a crash move because the news has no place to run so negatively that a sharp prolonged drop isn't supportable. As a result, the more likely results are:

• Real estate in some segments may fall further including parts of single family housing;
• Activity is unlikely to change very much from where it is because consumers are numb to the bad news;
• The bad news is digested and the medicine taken on the banking side. In general, by the close of 2010, the banking sector will be health if humbled.

So, look for continued weakness but stumbling growth to propel us forward until the economy finishes working through the systemic issues and begins to gather steady momentum. Even then the hangover, will keep a lid on growth for years to come.

For real estate investors, this all adds up to a great time to begin pushing on for your buying plans and getting your development plans dusted off for the very best projects.

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