It’s a timely question so many people are asking: Is now the time to buy or rent? Let’s take an honest, hard look at where we are now. Then, armed with facts, we’ll explore where U.S real estate is likely heading in the near future.
Don’t shoot the messenger, though!
Some of what you are about to read is quite depressing. If I was writing an article on why to sell in 2020, then it would be sunshine, lollipops, rainbows, and unicorns everywhere. But we are discussing buying versus renting in 2020—which is a completely different topic.
The below assessment is backed by data. I encourage you to review this information for yourself, fact-check, and come up with your own conclusion. After all, it’s your financial future at question here.
Like I’ve said before, I wouldn’t take health and fitness advice from a fat instructor, and I wouldn’t take financial or investing advice from my broke uncle, my broke neighbor, or a drunk guy down the pub. Yet so many people take bad money advice from poor people and end up with horrific results. Go figure!
Armed with the right information, we can position ourselves to make the wisest decisions.
Key Real Estate Market Drivers
First, let’s look at some key real estate market drivers.
Supply and Demand
There is no one-size-fits-all answer here. Each market and submarket has different stats. But what we do know is when demand is high and supply is low, then prices are high. Think hand sanitizer, toilet paper, and food prices recently.
Right now, we are seeing high demand in many markets across the U.S. It has many investors and Realtors saying “But real estate is thriving right now. Prices are high and business is good!”
Sure, for sellers and real estate agents. But what about buyers?
I even had an investor tell me, “We are not going to see a crash. We are at the top of the market. Everything is great.”
To that I replied, “Think about what you just said. What do you think happens after we hit the top of a market?”
As mentioned in my article, “The Best Real Estate Niche for Newbies Starting Out in 2020”:
“Historically real estate pricing (this is a generalization as there are many niches and asset classes within real estate) typically goes up and down in 7-12 year cycles, like an upward trending rollercoaster (with the new high-point going slightly higher than the previous high-point, and new low-point being slightly higher than previous low-point.)
“As we know, what goes up must come down, which plays true with our economy AND real estate prices. Given that we are near or at the top, we can all guess what comes next.”
On the flip side of supply and demand, supply is high, demand is low, and pricing drops to accommodate. The severity of prices dropping will depend on the spread between supply and demand. We’ll come back to supply and demand in great detail shortly.
Currently, interest rates are historically low. They most likely won’t go up because the U.S. has too much debt, and that debt is tied to interest that needs to be paid. Therefore, raising rates right now would likely lead to unsustainable payments and, consequently, a monumental crash.
To compensate the Fed is printing money like it’s going out of fashion. In fact, there is a high possibility that the U.S. dollar will literally go out of fashion and be replaced with a new currency in the coming years. (More on that shortly.)
Interest rates can’t go lower, so there is no more wind in the sail. For some investors, this is their last-ditch effort to buy homes with low rates. It’s temporarily supporting demand, but it’s a non-sustainable ticking time bomb.
I’m about to show you why.
But how about a little good news before I make you even more depressed! Refinancing, on the other hand, can play out differently right now. This is why many investors are taking advantage while prices are high and rates are low.
OK, now back to the dark reality…
Oh, boy! Do we really need to talk about this? It’s painful enough already. But use this information to help guide you in these unprecedented times.
I’ve heard so many investors say, “No one can predict the future,” or, “We don’t have a crystal ball.”
But I highly doubt those investors are spending a significant amount of time each day with their finger on the pulse of the economy and their eyes on the ball (so to speak). We may not know the exact trigger or timing, but we can certainly connect the dots and take an educated guess about what is likely to unfold.
Depending on where you get your information:
- As of June 2020, the unemployment rate was 11.1%
- As of July 4, 2020, 31.8 million Americans have filed for unemployment
- Roughly one in five workers are currently collecting unemployment benefits
In April, I wrote a BiggerPockets article “Warning: 5 Reasons the 2020 Recession Will Be Far Worse Than 2008.” At the time, it seemed controversial to many readers who commented, as they thought our economy was in good shape. It’s not exciting to be the bearer of bad news—I’m simply committed tons of time researching this data, then compiling it in a palatable format and passing it on to BiggerPockets readers so they can gain value from it. That way, all of us can more wisely navigate the current and rapidly-changing economic landscape.
Here’s what CNBC has reported recently:
- August 9: “Second $1,200 stimulus checks could be coming. For many, that won’t cover the rent”
- August 15: “‘It’s nerve-racking’ — Millions of Americans are still furloughed and unsure when they will return to work”
- August 16: “A flood of job losses looms as airline industry struggles in pandemic“
- August 17: “Postal service battles could also mean delays for those second $1,200 stimulus checks”
- August 17: “‘We will lose everything:’ Americans express frustration at Congress adjourning without a stimulus deal”
- August 18: “Millions of Americans are facing longer periods of unemployment, posing greater financial risks”
Sure, there’s the PPP (Payroll Protection Program) directed at businesses. This rolled out in March, and some got money in April. It was designed for employers to help pay their furloughed employees. As far as we know, this is ending. An additional $600 a week in unemployment benefits that was being distributed since the first stimulus bill also expired in July.
The fact is, this is all moving so quickly, it’s near impossible to get real-time data on all of it. So really, we are working off past numbers, which are increasing in an undesirable direction. Put simply, we can assume that the real numbers are even worse than the current numbers we have.
Seemingly, a “Great American Migration” is occurring, according to Zippia. Based off 2017-2018 data, “Here Are the States Where Americans Don’t Want to Live Anymore in 2020.”
The Washington Post reported the same: “The Great American Migration of 2020.” With coronavirus being the last straw, hoards of Americans are moving from larger cities to more rural areas.
As quoted in the Post‘s article:
“The work-at-home trend was already building, the small towns were already becoming much more cosmopolitan, with more and better coffee places and restaurants, and the big cities were already becoming prohibitively expensive… You’ll still have urban centers… But they’ll be less intense and more dispersed. You’ll no longer have to choose between unaffordable, overcrowded cities and incredibly boring countryside. There will be a more attractive middle ground.”
And here’s more proof from the headlines:
- “Hollywood’s Apocalypse NOW: Rich and famous are fleeing in droves as liberal politics and coronavirus turn City of Dreams into cesspit plagued by junkies and violent criminals”
- “New Your governor calls wealthy New Yorkers back to the city and says: ‘I’ll buy you a drink!‘” and “Come over, I’ll cook!’
Something to consider here is that many people who move from larger cities to more rural areas will do so because they have the financial capabilities to. Therefore, they’re also bringing more money, business, and tax revenue to rural areas. On the flip side of that coin, those who want to move but cannot afford to will be stuck in larger cities with less tax revenue, less business, and less money.
In the current day, we could see this migration temporarily creating high demand in smaller markets. Sure, people moving from New York, Chicago, Seattle, San Francisco, and Los Angeles could move from their previously over-inflated markets to new (from their perspective), more cost-effective markets. Although are they really taking into consideration the pricing of those markets in 12 months’ time?
I’ve spoken to tons of people moving out of Southern California that have no problem at all paying inflated prices in small out-of-state markets, as they still see it as a deal compared with CA pricing. This could be fine for those who are willing to ride this all the way through (most likely, 10+ years) until the market recovers from the next crash.
But it might be like catching of a falling knife for those who planned to sell or refi in 2021 or shortly after…
A slight piece of good news: This movement alone is not enough to keep real estate pricing high for a sustainable period of time. However, it may help keep demand high, at least temporarily, in certain smaller markets, which will buy investors a little more time.
With this great migration, what we knew of our markets may not ring true in the near future. To keep up to pace on this movement as time progresses, check out the U.S. Census Bureau’s “Metro-to-Metro Migration Flows.” Track the migration flow of U-Haul rentals and North American Moving Services rentals, and keep your eye on out-of-state drivers licenses that are being turned in to cities and states.
Considering only 18% of Americans have a minimum of three months’ worth of savings to weather the storm, we can assume that many non-working or unemployed Americans either have or will stop spending, including spending money on real estate.
Per The New York Times on May 27, “An ‘Avalanche of Evictions’ Could Be Bearing Down on America’s Renters.” And on August 17, the Mortgage Bankers Association reported “Mortgage Delinquencies Spike in the Second Quarter of 2020. ”
Conclusion: Many Americans Are Running on Empty
Let’s take a practical look here…
If you can’t pay in June, and you can’t pay in July, then it’s very likely you can’t pay in August. If you are three months behind on your mortgage and you only have three months of savings, you’re probably at your limit and your credit score is at risk. Once we get into September, the real numbers will show, people’s credit scores could be scorned, and banks will begin stepping in to take over. Foreclosure processes could begin. Depending on each case’s timeline, this likely means the first round of major foreclosures will occur in Q4 2020 or Q1 2021.
Some delinquent homeowners may list their home as a last-ditch effort at pulling whatever equity out of their homes that they can to help them pull through. Either way, it will result in more homes on the market.
Forbearance started in March. Around 4.5-5 million people have elected to use this program. It allows 180 days to defer payments. At the end of that time period (let’s be conservative and say September), if they can prove hardship, they get another 180 days. That would push the timeline for some folk out to April 2021.
Those who can’t prove hardship after the first 180 days could be subject to joining the first sinking ship of foreclosure processes in late 2020/early 2021. Those who make it through the second 180 days could be subject to joining the second sinking ship of foreclosures in mid to late 2021.
Sure, those who know how to play the foreclosure game can delay the foreclosure process for months—even years. But how long can the inevitable be held off? And how many will really be that savvy and determined?
All the while, renters who could not make payments have faced eviction, and more homes may come on the market for rent or for sale.
Other Factors Impacting Buying and Selling
What about Airbnb? Wasn’t that asset class on fire?
By 2019, every man and his dog knew about Airbnb, and most Americans have either hosted or been a guest at some point (or knew someone who has).
It sure was a thriving asset class—and then the pandemic came along earlier this year and cleared out most Airbnb hosts’ calendars.
How do I know this? We experienced it ourselves. Although mobile home park investing is my main focus, we also have a five-star, professionally run, short-term rental portfolio. We went from fully booked to literally zero guests in about 30 days. Then, our team worked their butts off to have enough guests during lockdowns to break even.
From there, they continued to work their way back up to full calendars again—and that’s where we are at currently.
Sounds like the problem is solved then, yeah? Highly unlikely.
We are losing confidence by the day. We must take into consideration that one of the main reasons we made it through was because our Airbnb listings are on the first page, we are “superstar hosts” with hundreds of five-star ratings per property. We have quality properties with five-star service at the most competitive price point in our markets. It’s a no-brainer that our properties got booked (compared to our competitors)—and even we only just made it.
What does this mean for the average Airbnb host who is NOT running their properties at the most competitive pricing in their market? Without hundreds of five-star ratings, “superhost” status, and full-time professional management?
In addition, we’ve been battling with Airbnb, which has been withholding payments and paying late. Was this only our experience? I think not!
Here’s what CNBC had to say about this as of August 11: “As Airbnb struggles with plunge in travel ahead of IPO, hosts are complaining about missing payments.”
Some quick math:
Upcoming evictions + Upcoming foreclosures + Airbnb hosts with cash flow NEGATIVE properties = I’ll let you decide
Hint: High inventory.
I haven’t even mentioned the silver tsunami of retiring baby boomers who’ll be wanting to sell homes compared to millennials who don’t have the desire or capability to purchase what the boomers are selling. That’s a whole other factor that will certainly add more fuel to this fire.
What We Don’t Know
How long will the Fed keep printing money—aka creating currency out of thin air, while simultaneously creating more U.S. debt? (Like we need more debt!)
Previously, I mentioned that the current U.S. national debt as of April was $24 trillion. Now, less than four months later, we are at $26.6 trillion and counting.
Check out this real-time U.S. National Debt Clock for yourself and watch the digits roll like a slot machine out of control.
On August 14, Forbes came out with “National Debt to Surpass $78 Trillion by 2028: What It Means for Americans.” In sum, it’s not good.
So, will unemployment benefits, PPP, or forbearance be extended? How many businesses will survive? How many people will stay employed?
Where Do We Go From Here?
With the displaced renters, displaced homeowners, underfunded Airbnb hosts, and high unemployment, we can expect to see a massive inventory shift beginning as early as late 2020 and a second wave in mid to late 2021.
We can only work off the data we have been provided thus far. This is where we are at now, and all we can do is keep our finger on the pulse and track this as it all unfolds.
Keep in mind that each sub-market will have its own circumstances. Keep your eye on supply and inventory. Monitor new listings and sales on Realtor.com and Zillow. Be cautious of big cities right now, as people are moving out. Keep your eye on rent increases and, more than likely, rent decreases.
Another thought: where are property tax prices headed in your market? This money needs to come from somewhere. With you being the investor, this is important to take into consideration.
There still may be properties that pencil out right now in your market. But you really need to know the area well and feel comfortable that your exit strategy will work given the current circumstances.
Are you going to ride this rollercoaster all the way to the bottom and “catch a falling knife”? Or are you going to tread carefully and wisely in this unprecedented environment?
Let me know your thoughts with a comment below.