Economic uncertainty has been the theme for the last 12 months.
Inflation ranged from 9.1% in June 2022 to 4.9% in April 2023. Its stubborn and slow decline resulted in the Federal Reserve raising interest rates from near zero to 5% to 5.25% in 14 months.
Rapid rate increases caused a great deal of stock market volatility producing a low of 28,725 in the US market on September 30, 2022, and a high of 34,589, two months later, on November 30, 2022. After the May meeting, the Federal Reserve indicated they were ready to pause interest rate hikes. Shortly after, surprise job and spending reports predict May inflation will rise to 6.1%, potentially reversing that directive.
Uncertain economic conditions make it challenging to choose the best investments primarily because economic performance is a major indicator.
Understanding Economic Cycles
Economic cycles (also known as business cycles) refer to cyclical economic patterns and describe the overall state of the economy. Cycles range between:
- Expansion
- Peak/Hyper Supply
- Contraction/Recovery
- Trough/Recession
Low-interest rates drive expansion. When money is cheap to borrow, the cost of financing growth falls, and businesses expand. Growth tends to include higher wages, giving consumers more discretionary income, and driving demand for goods and services. GDP rises, unemployment rates fall, and consumer confidence and spending rise.
Higher consumption levels lead to inflation. When inflation grows faster than wages, spending flattens, and economic activity peaks before entering a period of contraction.
Periods of contraction reduce corporate profits. Businesses lay off employees leaving households with less money to pay bills, and spending slows. GDP declines, unemployment rises, and consumer confidence and spending decline. Economic contractions are painful because some businesses fail, and consumers file bankruptcy at higher rates.
Higher interest rates, controlled by the Federal Reserve, drive the contraction until it eventually hits a trough before rising once again.
The challenge with the current cycle is that rapidly rising interest rates have not slowed job growth and inflation enough to stabilize the economy. However, forcing higher costs on borrowers too quickly can trigger a recession. The Federal Reserve is attempting to balance an economic contraction that slows inflation without tipping into a deep recession.
How Economic Cycles Can Forecast Opportunities
Economists agree we are currently in a period of contraction. What is uncertain is when the economy will begin its upward turn.
The rapid rise of interest rates directly affects real estate. Higher lending and operating costs make it more expensive to own property. However, consumers find it more difficult to buy homes due to higher borrowing costs, leading to more renters. This trend benefits multifamily investors.
Economic contraction also slows housing starts. When there is a housing shortage, fewer apartment buildings in the construction pipeline will produce opportunities for multifamily investors.
Lower inflation levels also create opportunities when properties come up for sale. Below-market pricing is more common during an economic slowdown, allowing investors to acquire assets at lower prices.
Today’s economic conditions allow you to position yourself to capitalize on the upcoming expansion cycle.
At McKee Capital Group, we have experience managing multifamily properties in various economic climates and understand how to capitalize on opportunities based on our current economic cycles. To learn more about real estate syndications and how we choose and manage properties, watch our introductory video.
