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While no one has the crystal ball to see what the next 12 – 18 months hold for the world economy … we are seeing some tantalizing hints lately as to the depth of the coming recession.

And I agree with the predictions of a long, deep period of general economic struggle … here’s why.

It has to do with a specific graph I saw in John Mauldin’s blog this week and the concept of Mortgage Equity Withdrawals or MEW’s.

A Mortgage Equity Withdrawal is any event where a homeowner refinances their home(s) and pulls out equity in the property. In a rising real estate market you will be safe to make an MEW because the underlying asset is going up in value.

MEW’s are the visible, tangible and real measurement of what has become known as the “Wealth Effect”. When your home value is rising, you pull out money and pump it into the economy on

• a new Escalade
• or a 60 inch flat panel TV
• or a rental property in Vegas
• or breast implants
• or whatever

And the consumer doesn’t sweat the outlay because the market just keeps going up and “its different this time.”

The effects of MEW’s on the world’s economy over the last several years have been MASSIVE. Just look at the graph here that I have borrowed from John Mauldin. PLEASE NOTE: the numbers in the table are in BILLIONS.

In 2006 MEW’s dumped half a trillion dollars into our economy.

In the latest quarter … and these numbers are before the latest manure hitting the fan … this has dropped to 9.5 Billion. It looks like several years of artificial inflation of spendable dollars is coming to an end.

This is due to the double whammy of

• Falling Real Estate Values
• Tougher Loan Criteria

And neither of these is going away in the foreseeable future. We are all going to have to start living WAY more within our means and this has an equally MASSIVE effect on the world economy going forward.

Since the last few year’s performance was propped up by falsely elevated real estate values … what happens without the ability to cop a MEW when the consumer needs it? The loop is closing. What started as a banking/lending crisis is looping back into a plain old recession as the economy turns south. How far south and for how long is anyone’s guess … and these numbers point to a long, deep recession coming on.

My advice:

• Hunker down, hoard your cash for the massive buying opportunities that will come.
• Think more and more about the effect these dynamics will have on the Multifamily niche.

AND don’t expect a quick rebound.

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