Caution Could Stave Off Next Recession

Article originally posted on Globe St. on October 3, 2019

Investors are predicting and preparing for the next recession. The increase in caution and conservatism could actually reduce the impact of a downturn if and when it hits. The severity of the last recession has driven an increase in caution among investors, particularly as the cycle matures.

“The memory of the last recession was searing enough that there is persistence in not getting carried away like last time,” Peter Muoio, chief economist and head of data insights at Ten-X Commercial, tells GlobeSt.com. “For a lot of people the last recession—the financial crisis—is the only recession that they have been through professionally. When they hear the terms business cycle or downturn, it is almost triggering because it was so awful last time.”

There are also other factors helping to mitigate the next recession. It isn’t only investors practicing caution as the end nears. There has been a greater level of caution overall this cycle. “What we envision if there were to be a cyclical event in the near future, it wouldn’t at all be like that,” says Muoio. “We don’t have the aggressive underwriting and debt on properties that we had in the last recession, and for the last three years, we have seen high but flat pricing. These are all mitigants and will create a less dramatic downturn than some of the downturns that we have had previously.”

In addition to banking regulations, the decrease in interest rates will also help to reduce the impact of the next recession. “With treasuries heading back south, the cap rate spreads have widened again,” says Muoio. “That is more good news in mitigating potential risk. When interest rates were moving up, cap rate spreads were getting very tight relative to their historical norm. That was a dangerous sign that there wasn’t a lot of leeway if something were to happen. Now that interest rates have gone back down, we have built in that buffer.”

This level of caution may not last forever, but for now, investors are saving themselves from another economic apocalypse. “The degree to which we go back to our old ways and eventually make the same mistakes all over again is unknown, but I do think that some of the structural changes that were made in terms of bank regulation and the like are changes that have kept things more conservative this time around,” says Muoio.

Peter Muoio

Peter Muoio is the chief economist for Ten-X.

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