What the December Coronavirus Stimulus Might Mean for Real Estate Investors
The ongoing pandemic has hit our country hard, causing significant loss of life and changing our habits. We are all looking forward with the hope that new vaccines will quickly get us back to a new normal.
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Interestingly, however, from the standpoint of the typical BiggerPockets single family rental investor, 2020 has been a surprisingly stable, if not profitable year.
Does anyone reading remember when, in early April, a bunch of big time news outlets reported how “NEARLY A THIRD” of American renters didn’t pay April rent? Well, those headlines got a lot of clicks and some good discussion going on BiggerPockets, but the fact of the matter is that the biggest reason for that drop in April rent collections was that we were comparing rents collected April 1-5, 2019, with rents collected April 1-5, 2020. April 4th and 5th were Saturday and Sunday in 2020. Banks are closed on Sunday.
Oops. False alarm. The real estate market didn’t crash, and doomsday did not materialize.
All in all, rent collections have been remarkably strong for landlords in the single-family rental market, and we will probably end 2020 collecting just 2-3% less rent than 2019. In fact, rent prices have increased, on average, across the country for single-family rentals.
That, coupled with strong appreciation rates, means that many landlords I know are having one of the best years in a long time.
Note that it hasn’t been a picnic for the entire industry. Apartment rents have fallen year over year. Renters and homeowners alike are ditching the city and their apartments for single-family homes.
And, of course, this dynamic is impacting some markets differently. It’s not a good year for San Francisco and New York landlords. There are also plenty of stories about landlords unable to evict poorly behaving tenants, plenty of markets severely impacted by COVID pressures, etc. However, the fact of the matter is that for all the doomsday predictions, the market as a whole has held up remarkably well.
And I think most of us will agree that massive, unprecedented government intervention played a big part in that.
Government’s Role in the Single-Family Rental Market
While the $1,200 stimulus checks made all the headlines earlier this year, I think the real backbone of the rental market in 2020 has been the CARES Act’s impact on unemployment and its expansion of benefits.
Unemployment benefits in the U.S. are complicated, but to understand how they might impact the rental market, we need to look at two things:
- The amount of unemployment benefits
- The length/duration of unemployment benefits
First, let’s talk about the amount of employment expanded by the CARES Act. Prior to the CARES Act, unemployment benefits averaged about $378 per week.
The CARES Act increased minimum payouts to 50% of the recipient’s previous weekly payout, slightly adjusting the average payout starting in April. It also added an extra $600 per week through the end of July 2020.
Second, the duration—most unemployment benefits expired after about 26 weeks prior to the CARES Act. For example, in a world with no CARES Act, someone laid off on April 1st might stop receiving benefits around October 1st.
Under the CARES Act, benefits extended for 13 more weeks. With the CARES Act (April edition), someone laid off on April 1st might stop receiving benefits on January 1st. This person is receiving far more in benefits, in most cases, and for a longer duration. This is what helped millions—maybe tens of millions—of tenants continue to pay rent throughout 2020.
As a student of the small residential real estate market (1- to 4-unit properties), the two periods that worried me a bit this year were September and then January 2021 (upcoming). September worried me because I wondered just how important that $600 bonus per week was for many households. The $600 per week expired at the end of July, so you’d think that it would have been available for August rent, but not for September rent.
My concerns about September appear, in retrospect, to have been unfounded. We didn’t see a collapse (or really any noticeable changes) in the rental market come August.
January 2021 worried me, as well, because with all the turmoil going on in politics this year, I wondered if the government would pass another stimulus package, extending unemployment yet again.
Well… hopefully you at least read the headline of this article. Yes, we passed another round of stimulus.
While there were other factors included in the April CARES Act, like the PPP programs preserving jobs and the $1,200 stimulus checks, for me the real meat and potatoes supporting rents in the single-family rental market appears to be good old fashioned (but seriously turbocharged) unemployment benefits.
Now, About the Current Stimulus Package
That was a lot of background, but I think it’s important to review that and have it all as context as we digest the latest and similarly massive December 2020 stimulus package and think about the consequences that it might have on the rental market.
First, what’s in it:
- $286B for direct aid (mostly direct checks and unemployment benefits)
- $325B for small businesses
- $82B for schools
- $69B for public health measures
- $45B for transportation
- $25B in rental assistance
- A bunch of other “smaller” items adding up to a total of ~$900B
While the new stimulus goes lighter on the stimulus checks—$600 per person, instead of $1,200—it continues to pump money into unemployment or directly to households via stimulus checks to the tune of $286 billion. Note that in recent days, our government appears to be gearing to increase stimulus checks to $2,000 per person, up from $600 per person prior to Christmas. Unemployment benefits will be continued for another 11 weeks and further boosted by another $300 per week on top of that through March 14th. This is the heart of the bill, or as I’ve said probably too many times in this article, the “meat and potatoes” as far as the single-family rental market is concerned.
The other piece of the bill that impacts real estate investors (aside from general stimulus that real estate indirectly benefits from) is the $25 billion allocated for rental assistance. This will be allocated toward lower-income families to help them pay rent or pay off past-due balances.
Coupled with this, the measure extends the eviction moratorium through January 31st.
Moody’s Mark Zandi estimates that tenants nationwide might owe $70 billion in back rent by the new year—or about $5,850 per family across 12M families. Eviction moratoriums will have to be paired with rental assistance—perhaps as much as $100B by the time this is all said and done.
This $25B seems like it is just the tip of the iceberg to me. This is America, and I think our government is going to have a hard time halting evictions without making property owners whole on rents. While it may seem frustrating to some not to be able to evict a tenant and there may be timing issues with rent collections, I wonder if the eviction moratorium may ultimately be a form of subsidized rent for landlords. I wonder this because in conjunction with enforcing the eviction moratorium, I believe that the federal government and state governments will basically have to make good on all that back rent with various forms of rental relief.
So, What Do I Think Is Going to Happen?
After all that, I’m going to go with a pretty boring prediction: I think more of the same is going to happen over the next few years. I think that more stimulus is likely to come over the course of 2021, and that our government will continue to prop up households with unemployment and stimulus checks until the pandemic is “over”. I think that this will result in more of the same for real estate investors in the form of continued significant property price appreciation (for single family rental properties in particular), coupled with more modest rent growth.
I believe this because the big levers, at the very highest level, that impact landlords and rental property investors are:
- Interest rates
- Tenant demand
Current government policy is to reduce interest rates and assure everyone that the low rates are here to stay. Low rates mean lower payments and rising property values.
Current government policy is to double and triple down on economic stimulus generally and distribute straight up cash to the unemployed and lower-income folks generally. This additional stimulus will keep demand strong.
Current government policy is to build up increasing amounts of debt and expand the money supply, leading to higher risk of inflation.
I really don’t see a big change in supply coming. We still aren’t building enough homes, and I think we will continue to see rents and property prices increase until we do. The lack of supply would drive prices up even if inflation or low interest rates weren’t changing variables.
I think that Congress is going to keep pumping money into the economy until this pandemic is “over.” I think that the Fed is going to keep interest rates low for quite some time. And I don’t think that any sane tax hike can possibly pay for the actions our nation has taken in any short-term to medium-term timeframe.
If low interest rates are here to stay, that tells me that prices have even more room to climb. While you may think prices are insane, the fact is that the monthly mortgage payment matters a lot more to most homeowners (and maybe a lot of real estate investors) than the price of the property. When interest rates fall, the payment decreases, and your average homebuyer can buy more property at the same price. Your landlord can still achieve cash flow on a lower rent-to-price ratio.
The Constitution protects private property, and I think that it will be hard to indefinitely extend the eviction moratorium without rental relief. Relative to the massive numbers (trillions and trillions), a hundred billion or less to bail out tenants who haven’t paid rent during the eviction moratorium is a small price to pay and will avoid a lot of messy lawsuits (i.e., landlords suing former tenants and/or the government for back rent).
I also speculate that with stimulus money and unemployment, many folks have similar levels of income and cash flow over the course of 2020, compared with 2019. And we have certainly seen a reduction in spending in most households over 2020. That money, in most cases, is going to be available to be put toward rent.
Again, we are not seeing a dramatic drop-off in rent collections industrywide. The government has been gifting hundreds of billions of dollars to folks who are disproportionately tenants, and that money flows right on through to their landlords in the form of the rent check.
The Bottom Line
It appears to me that the current set of policies are likely to create a world in which low interest rates may be here to stay for a while and in which rents are being subsidized by society by adding to the public debt and likely ultimately paid for via inflation.
Of course, I’m sitting here as the CEO of BiggerPockets, saying that I think real estate is likely to benefit from the current state. I get it, conflict of interest, know your source and all that. But honestly, I think that’s the case—at least in the short-term to medium-term.
One day, when interest rates rise and/or Fed policy changes and inflation is no longer a thing, we might have a giant mess in the single family rental market. But I wonder if that day is some time off. I’m just one guy, and I could be completely wrong on all this, but this is how the market presents itself to me today.
I also can’t resist, and I know I’ll get beat up in the comments for this, but I want to leave you with a final thought. Take a minute and consider the three big levers that our government is pulling:
- Effectively insuring landlord rents with unemployment and rental relief benefits
- Forcing interest rates lower
- Setting our country up for inflation long-term
These items, in my opinion, combine to amount to the destruction of wealth for the poor and middle class, siphoning wealth from wage-earning Americans and into the pockets of landlords and real estate investors. Admittedly, the alternative, allowing evictions to take place, rents to correct, and renters and landlords to go bankrupt alike, is a hard, stark outcome.
What do you think? Am I right? Or am I wrong?
Let me know in the comments!