Financial Crisis part Deux? Why the next recession won’t look like the last.

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Warren Buffett

Trade wars, slowing growth, inverted treasury yields — do these portend a looming recession or are they merely bumps in the road to continued growth?  Many investors I know and work with have become increasingly concerned about recession and the pain of 2007 is still raw. I can’t tell what the future holds for Savannah real estate and real estate investing in general, but I do know a few things:

  1. Real estate is a local market
  2. Credit has not been extended recklessly like it was in the early 2000s
  3. Cash is good for providing safety and peace of mind, but it remains a terrible investment
  4. If you follow sound investing principles, you will not be led astray
  5. Time in the market beats trying to time the market

Over the next couple weeks I will explore some of these points.  For now, let’s focus on the first one:

Real Estate is a Local Market

Home prices have been going through the roof in places like Seattle, in part due to rich Chinese citizens buying up west coast real estate to shield their assets from the Chinese communist party (CCP) — and now the west coast markets are beginning to soften as the CCP tightens restrictions on the flow of money out of China.  That investing drove up the average American home price, but what does that mean for Savannah?

Absolutely nothing, because Chinese money hasn’t been coming here. Let’s focus on the market we do know and disregard what’s happening in Seattle, Denver, Detroit, New York, or Miami. What’s happening in Savannah and how does it affect me?

The average home price in the Savannah area is still below its pre-2007 peak, and since the market’s bottom in 2012 the average home price has grown by 74%, while Savannah’s GDP has grown by 40% from the end of the recession in 2009 until 2017 (the last available data that I found, see sources at the bottom of this post.)  There are five months of housing inventory for sale currently, making this the strongest seller’s market since 2007. What does this mean? 

  • Real estate appreciation has outstripped economic growth, but not to the extent that it did in the early 2000s.  This is a warning signal to avoid some of the overpriced assets currently on the market, but this is not a signal that we should stuff our cash under the mattress.
  • If you’re thinking about selling in Savannah, now might not be a bad time to do it, especially if you own in the historic district or the islands — places where asset appreciation has outstripped increases in market rent. Why not free up some of your equity and invest it in a neighborhood where you can achieve a higher return on investment?
  • If you want to invest in Savannah, it’s tougher to find great deals, but they’re still out there if you know where to look.  This is where a good local agent can be a valuable asset.
  • If you are currently renting in Savannah and aren’t necessarily looking for an investment and/or just want to own your own place to call home, there is still a lot of value to be had.  With interest rates as low as they are, your mortgage payment will almost certainly be lower than your rent, and wouldn’t you rather be paying off your own mortgage than your landlord’s?

Whether you’re looking to invest or become a homeowner, buying real estate is making a statement — you are putting your money where your mouth is when you say: “I believe in the future of Savannah, I believe that in 5, 10, or 30 years, people will still want to call this place home.  I believe that if and when I go to sell this home, I will be able to at least get out of it what I put in.” Do I feel that is the case with Savannah?

Yes, so much so that I’m still buying in Savannah myself.  Here’s why:

  • Savannah is a beautiful city and it’s very walkable.  As a millennial, I know what my people want, and increasingly it’s not a suburban life.  We want trees, green public spaces, and we want to be able to walk to restaurants, bars, and stores.  Savannah checks those boxes.
  • Savannah has a diverse economy including the following major industries/employers: 
    • Fort Stewart/Hunter Army Airfield
    • Gulfstream
    • two major healthcare systems
    • JCB excavators
    • International Paper
    • the rapidly expanding Port of Savannah
    • a total University enrollment of 17,000 students
    • a robust tourism industry
    • a growing movie and television industry
  • These industries are robust. Fort Stewart and the 3rd Infantry Division is home to the only U.S. Army armored assets on the east coast and the only ones within 50 miles of a deep water port — in short, the Department of Defense is not likely to draw down forces here because doing so would hurt it’s ability to project power around the world. Gulfstream is a world-renowned private jet manufacturer. Healthcare is only going to grow as the U.S. population ages. Georgia Southern acquired Armstrong University in Savannah in 2018 and is growing. The Savannah College of Art and Design is one of the best art schools in the world and many of its graduates elect to stay in Savannah and bring this town more good art, good food, and good business — all of which feed into making this town a location of choice for young professionals, tourists, and the growing Georgia movie and TV industry.
  • The port of Savannah is currently undergoing a massive expansion to accommodate the new class of super-panamax cargo ships (basically, as the Panama canal expands, ports on the eastern seaboard must also expand to accommodate the larger ships.) What does this mean for Savannah:
    • The Port of Savannah is one of the fastest growing ports in the country, with an annual growth rate of 7% between the years 2005-2015.  
    • As of 2016, the port was the fourth largest container port in the NAFTA region, behind Los Angeles, Long Beach, and New York.  
    • The port is currently undergoing an expansion to accommodate the expansion of the Panama Canal, and the Georgia Ports Authority has detailed plans to further expand the port in order to bring the port’s capacity from the current 5.5 million twenty-foot container equivalent units (TEUs) to 8 million TEUs by 2028.  
    • The economic benefit is expected to be 8% of Georgia’s GDP and 9% of Georgia’s total employment.

The future for Savannah is bright and there are deals to be had for any buyer, but the days of dirt-cheap investment properties are largely gone – in 2019, it takes knowledge, skill, and a good network to find real estate investments that will yield a high return on investment.

That being said, I still believe in this market, so much so that my wife bought her own duplex in the east-Victorian district just this April. She put 5% down on a Department of Veteran’s Affairs (VA) loan to purchase the property, and now we live in one unit and rent the other for almost $300 more than the total mortgage payment — tell me that isn’t a good deal!

In the coming weeks I will dive deeper into why I believe 2019 is different than 2007, why it’s still a good time to get into the market, and how to avoid the pitfalls that led many reckless investors to financial ruin in the past.

Sources:

http://gaports.com/media/press-releases/articleid/200/artmid/3569

http://gaports.com/about/economic-impact

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