The State of the Economy: Approaching Your Investments in the Coming Year

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An ostrich can have its head in the sand, but that won’t stop a lion from biting it in the butt.

This year has been a rough one for many real estate investors, but we can’t afford to bury our heads in the sand. We need to take a look at what’s going on with the economy so we’re prepared to deal with what we are—or could be—facing.

I’m going to begin by saying this: Always do your own in-depth homework and come to your own conclusions. I’m not a financial advisor, attorney, or CPA, nor do I give any investing advice. It’s up to you to take the information in this article into consideration, do your own research, and seek counsel from your advisors to best position yourself.

I will warn you—not all of what I have to say here is light in nature. And although I don’t recommend resonating in the darkness of the probabilities and possibilities mentioned, I do think it’s important that we at least take these factors into consideration when approaching investments over the coming year.

Evictions and foreclosures

Just when we all believed the eviction moratorium would not last much longer, the eviction (and foreclosure) moratorium reached the Supreme Court—which decided that moratoriums could no longer be in place as they are “unconstitutional.”

Now we have free rein to evict as usual, and landlords all over the U.S. now have control of their collections once again. This is amazing news for those of us in the rental real estate space and makes us feel even stronger going into recessionary/economic downtimes.

There are a few states that still have moratoriums in place, although landlords are free and clear to pursue evictions for all the markets in which they own properties. My company somehow made it all the way through these moratoriums totally unscathed as we were not negatively affected at any of our mobile home parks.

Here is a full eviction and foreclosure moratorium report that shows a state-by-state map with status. It also has a link to the rental relief programs for each state, which could prove useful to many of you landlords out there who may not have come out of this as unaffected as we did.

Does this mean a real estate crash is coming?

In my opinion, the short answer to that question is yes. Here’s why.

More than 11 million American households continue to report being behind on their rent as eviction moratoriums were in place. As of 2020, there were 128.45 million households in the U.S., so that means 8.56% of America is behind on rent payments (this does not include those behind on mortgages!).

The average American household had three months of reserves in savings, but last year’s lockdowns chewed that up for many people. Sure, some will get caught up, but many won’t. Exactly how many is still to be seen.

Evictions will take a few weeks to a few months to go through, and courts will be overloaded with cases, which may cause more delays. But we can count on more rental real estate to be on the market shortly, which will affect supply and likely rental and sale pricing too.

Many landlords will be cautious of renting to recently evicted tenants, which will put a lot of people in a bad position and will likely create an oversupply of rental real estate. This will likely mean much more demand for self-storage as people are temporarily displaced, and it will likely bring more demand to the affordable housing space (aka mobile home parks).

I think it’s safe to predict that we will begin feeling the effects of evictions for the rest of 2021. Over 8% of America is behind on rent. It’s hard to say exactly how many of these will proceed to eviction. Having that said, the impact here could prove to be monumental.

In addition to those behind on rent, an estimated 1.7 million households are in forbearance plans. Most of these homeowners will be forced to exit these programs, putting them in a position where they must perform on loan payments. Some of these homeowners may be able to do a loan modification that could save them (at least for now). Also, many have recently milked their equity dry with refinancing during the preceding 12 months. Even if a fraction of these homeowners do not get caught up, this could bring a significant amount of houses on the market (in addition to rentals).

Foreclosures will take longer than evictions, so the full effect of this will not be felt until after those go through. This could take three to six months or longer for those who know how to battle against it and draw things out. So, I’m thinking we won’t begin to feel the effects of foreclosures for the rest of this year, and I anticipate the impact will be stronger by spring 2022.

Even if there aren’t as many foreclosures or evictions as one might expect, housing prices can only reach such height until the buyer simply will not pay any more for a house, regardless of the market trend. It seems that Orlando, Fla., may have already reached this point, even with the abundance of people flocking there for a more favorable freedom environment. How many markets will follow suit and cap out in the near future?

Now add in the effects of the potential of people passing away from either COVID or “vaccinations” (regardless of your beliefs or viewpoints on either of those), or those baby boomers whose natural time was up (currently the age group that has the largest population in the U.S.). Then factor in the baby boomers who will retire and could very likely want to downsize, which will place additional houses on the market as some will buy a smaller house as a replacement and others will rent instead of repurchasing. This, plus the abovementioned groups of homeowners passing away, would result in even more houses on the market.

Supply chain disruptions

There is also supposed to be an accelerated supply chain disruption due to the possibility of truck drivers going on strike and some logistics being either delayed or shut down.

A prime example of this: In October 2020, there were two container ships at anchor at the Port of Los Angeles in Long Beach, Calif. (the cargo coming into the Port of Los Angeles represents approximately 20% of ALL cargo coming into the United States!), which had fluctuated from one to three container ships anchored in any month over the previous 12 months (before October 2020). In September 2021, there were a whopping 56 container ships anchored at the Port of Los Angeles, and this number seems to be massively trending upward. Try and tell me this will not have a monumental impact on our supply chain!

There are also the rising shipping costs (due to delayed timelines as mentioned above) that companies are faced with, which of course will get pushed on to the consumer.

If truck drivers do, in fact, go on strike or we see further supply chain disruptions, that can only compound our already slow and price-increasing supply chain. This, among other things, could ultimately cause an increase in poverty, homelessness, and, it’s sad to say, also morbidity.

All of the above factors combined could lead to a year-over-year increase in morbidity, leaving even more vacant houses on the market and fewer people in place to buy or rent them. Yes, it’s a very horrible and dark thing to discuss or think about, but it’s something we need to take into serious consideration, regardless of our viewpoints on any of those individual topics.

If we do see an increase in morbidity, that could bring many homes on the market (an increase in supply) with no rise in buyers (no increase in demand)—and this would be in addition to the evictions, foreclosures, and baby boomers downsizing.

Unemployment

Federal unemployment benefits ended for nearly 10 million Americans earlier this year. That’s 75% of people who were receiving unemployment! This means there will be much less money being injected into the economy as spending will decrease.

To add to that, Americans on the dole rose up above 12 million in September, perhaps due to Hurricane Ida.

Some of these people will now go back to the workforce, which is a good thing (as more goods and services can be produced), but there is also talk of the stimulus payments being either reduced (tapered) or cut off, which could have detrimental consequences.

Sure, if the stimulus continues, that means many households will still have income, but that stimulus money is coming from the Federal Reserve “printing money,” which has the consequential effect of consumer price inflation. So even if the stimulus proceeds, pricing will likely rise at a rapid rate, so that money will buy much less. However, if the stimulus money gets cut off, then not only will there be even less money being spent to stimulate the system, but even more people could be driven into poverty. In this case, there would be further consequential effects on businesses, supply chains, unemployment, people’s ability to get loans, the real estate market (as a generalization), and the banking system.

With winter on the horizon, we could potentially see more lockdowns due to a rise in COVID rates, which could further increase unemployment and the number of people who can’t pay rent or mortgage. This would further increase evictions and foreclosures, meaning more houses on the market with fewer qualified people to replace them.

Being prepared

All of the above combined could lead to an oversupply and under-demand of housing, consequently resulting in potentially lowered house pricing (among other financial crisis situations). It’s hard to say which way rental real estate pricing will go in the near future, given that we are at a crossroads of potentially larger rental supply versus price inflation. The latter could also be the same with housing prices, although it seems like we are close to our price ceiling across the U.S., so I’m skeptical at best that prices could rise much higher for much longer (under any circumstances). In my opinion, it’s a higher probability that prices would fall, due to the compound effect of the abovementioned factors.

It’s my prediction that these things combined will lead to a housing crash beginning as early as the end of this year and being in full swing (and escalating) by summer of 2022.

I’ve already liquidated what I believed were my “risky” assets (given what I believe we are entering economically). I’ve refined and taken advantage of low interest rates, increased my credit limits, reduced my credit interest rates, and placed capital in investments and places I believe are most resistant, secure, and protected. I’ve built what I believe are sound food and supply reserves and obtained resources I think will be valuable in the coming years. I’m of the impression that the last two years have been a training run for what’s to come, and that the next two to three years will go down in history.

If I am completely wrong in my assumptions here, then I believe I’ve positioned myself for success regardless of how things pan out. But if I’m even partially right—but was not prepared—that is a position I would not want to be in. So I’m eliminating that as a possibility by being prepared for a dramatically changed real estate market (generalization) at the least, under the assumption that what has worked in the past may not work moving forward.

I’m still very bullish on self-storage, at least for the next three years or so, and for mobile home parks for the long run. Mobile home parks are the biggest contributor to solving what I believe is America’s largest real estate problem: the need for affordable housing ($700 or less in monthly housing cost).

I may be totally wrong here, and again, I’m simply letting you know what I’m doing. How you prepare—or not—is up to you!

Remember that predicting the future of the economy or its submarkets is a game of probabilities and possibilities, not a game of certainty. All we can do is gather as much information as possible and decide what we as individuals think those highest probabilities and possibilities are—and be prepared.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.