As anyone paying attention to this trainwreck of a year has noticed, unemployment is extremely high. Back in April, when the COVID-19 pandemic first started to hit the United States, job losses hit close to 15 million, with a record-setting number of unemployment claims.
That month, the unemployment rate skyrocketed to 14.7% (it had been 3.5% in February), the highest rate since the Great Depression. As of this writing, the unemployment rate has come back down to a substantially better, but still very bad, 8.4%.
To cover for this unprecedented disruption, the government has borrowed and printed money at an equally unprecedented rate. “Through the first 10 months of fiscal 2020, the government took in $2.82 trillion in revenue and spent $5.63 trillion, for a year-to-date deficit of just over $2.8 trillion” In other words, the U.S. government spent almost exactly twice as much as it brought in.
To add to this, there were signs the US economy was in trouble even before the coronavirus came about.
Yet, the real estate market is on fire. The collapse many thought would come has yet to materialize. While frightening, headlines like The Wall Street Journal’s piece from April titled “Nearly a Third of U.S. Apartment Renters Didn’t Pay April Rent” also turned out to be exaggerated.
For us, delinquency is up a tiny bit, but it’s really within the margin of error. This is true for most other investors I’ve talked to as well. Back in April, the National Multifamily Housing Council found that “89% of apartment households made a full or partial rent payment by April 19 in its survey of 11.5 million units of professionally managed apartment units across the country.” This was down only 4% from March, before the effects of the coronavirus and subsequent lockdowns could be felt.
Related: My Tenant Lost Their Job – Now What?
And while some are hurting in states or municipalities where there is an eviction freeze such as Indiana and Oregon, there does not seem to be, as of yet, a major eviction crisis. Of course, that doesn’t mean there will not be. As The New York Times noted in August, “According to one study, as many as 40 million people in 17 million households risk eviction by the end of the year—an astounding figure.
“Yet interviews with dozens of landlords across the country returned comments like ‘no difference,’ ‘pleasantly surprised’ and ‘seems like normal.’ That view is reinforced by the corporate earnings reports of housing providers and a weekly survey of big landlords by the National Multifamily Housing Council, which for several months has shown little difference from rent collections a year ago.”
But The New York Times also notes that many of the $2 trillion CARES Act programs, including the $1,200 stimulus payments and $600 per week extended unemployment benefits, have lapsed. The new program is only offering $300 additional per week and that will soon end as well.
So will the economy improve enough to get people back to work before all these benefits run out? Will Congress extend them again? Will “money printer go brrr” ad infinitum without the United States going full Weimar?
Studies with alarming headlines like the one mentioned in The New York Times article posted above keep coming out. Of course, scare headlines are a dime a dozen, and what does “being at risk” of eviction actually mean? For most, does it mean an eviction is likely or just a faint possibility?
So what are real estate investors to make of all this and how should we proceed in the coming months?
Analyzing an Uncertain Market
As noted above, despite the recession, high unemployment, massive government deficits, uncertain future, and that pandemic thing, the real estate market is still on fire. Home sales increased 24.7% in July and the average sale price just hit an all-time high.
Zillow notes that the average sale price for houses has increased each month of 2020 from $247,000 in January to $257,000 in September and rates the overall market as “Very Hot.” According to the National Association of Realtors, current unsold inventory in August sits at just a 3.1 months’ supply.
As Keeping Current Matters notes, “To have a balanced market where there are enough homes for sale to meet buyer demand, the market needs inventory for 6 months.”
We are in a very hot seller’s market. And that doesn’t make a lot of sense given that we’re also in a deep recession.
Of course, there is no great way to time the market. Many economists and investors have tried and almost all have failed. That being said, it’s hard to imagine we aren’t nearing some sort of peak. Sooner or later, the Federal Reserve will need to pull back from the endless quantitative easing or we’ll return to 1970s-style stagflation (at best).
On the other hand, other than during the 2008 financial crisis, real estate has (nationally, not necessarily regionally) appreciated at a pretty steady rate, with only a few small declines since 1963—aside from 2008, of course. I expect prices to cool off and decline modestly, but not collapse. But again, economic predictions should always be taken with a grain of salt.
Another thing to consider is volatility. In stock investing, there’s something called a beta, which measures a stock’s volatility as compared to the S&P 500. A higher beta (i.e. a more volatile stock) means a lower price and vice-versa. That’s because people are normally and properly risk-averse and need a premium to consider buying an investment with extra risk.
This year, the stock market had its largest-ever decline and yet is now somehow at an all-time high. In 2020, the whole stock market is extremely volatile, as is most of the American economy other than real estate—for now. It’s hard to imagine that real estate will remain completely unscathed before it’s all said and done.
So to sum up, we are in a recession with a relatively large number of tenants facing eviction while the real estate market is likely near its peak in a volatile overall market place.
Investing in an Uncertain Market
My normal advice to new investors is to jump in sooner rather than later. It’s easy to get stuck endlessly reading books and listening to podcasts and never actually starting. My normal advice doesn’t necessarily apply right now.
This is not a market I would be head-over-heels to jump into. Sure, if you find the right deal, go for it. But investors and particularly newbies should be substantially more cautious and conservative right now.
If you have been considering liquidating a few properties—with prices rising and inventory at historic lows—this is not a bad time to do it.
That doesn’t, of course, mean that you need to or should sell all or even some of your properties. We certainly aren’t doing so. But we are being far more cautious with our purchases. A more volatile market that’s likely near the top means we want a better deal than before.
I still believe in dollar-cost averaging and not trying to time the market. So we are still trying to make acquisitions. But only of really good deals. Whereas before we aimed for 75%, now we want something more like 65% or 70%. We are in no hurry to buy and are perfectly fine if none of our offers hit for the time being.
With all the eviction moratoriums and renewed possibility of additional regulation, I would make sure to make tenant screening an extra priority. And if at all possible, try to shore up your cash reserves in case that eviction crisis does ever materialize. If this requires cutting back on some personal expenses, I would recommend that as well.
This would also be a good time to spend extra time building up your systems, whether they be rehab management, property management, or whatever else. It’s also a good time to try to build your network and find potential private lenders for when the time is right.
While I doubt there will be a collapse, the market will eventually cool off and probably decline some. When it does, there will be a lot of opportunities to jump in and scoop up bargain deals. I would not stop buying until that time comes, but I would certainly be trying to position yourself to take advantage of it when it does.
How are the current market conditions impacting your decision-making?
Let us know how you’re responding in the comments