How the Unemployment Rate Affects Us All (Yes, Even the Employed)

How the Unemployment Rate Affects Us All (Yes, Even the Employed)

6 min read
Whitney Hutten

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence.

Experience
After purchasing her first rental in 2002 and hitting a home run, then nearly losing it all on her second deal, Whitney took control and figured out how to invest in real estate the right way. She realized that success must leave clues. So, she studied and replicated the very personal finance and wealth creation strategies the wealthy use to create financial freedom.

Today, Whitney is a partner in $500MM+ of real estate assets, including 5,000+ residential units (MF, MHP, SFR, and assisted living ) and 1,430+ self-storage. Additionally, she has flipped over $3MM in residential real estate and has a solid portfolio of commercial notes. (Don’t tell anyone though… BRRRR investing is still one of her favorite strategies—26 units and counting!)

In 2018, Whitney founded ASH Wealth and the Investor Accelerator Mastermind, where she helps you develop a clear, workable plan that gives you the results you dream of, solves your business startup or scaling issues, and drives massive progress toward your real estate and financial goals.

In her spare time, Whitney enjoys trail running, mountain biking, camping, and spending time with her family.

Press
Whitney’s been featured on the BiggerPockets Blog, BiggerPockets Real Estate Podcast episode #340, BiggerPockets Rookie Show episode #29, BestEver Podcast, The InvestHer Show, The Investing for Good Show, Life Bridge Capital podcast, The Road to Family Freedom podcast, Frenzied to Financial Freedom podcast, Purchase to Profits podcast, and more!

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In any epidemic (in this case pandemic), you have three issues that you have to deal with: public health, the economy, and social impact. As COVID-19 continues to unfold and the death toll climbs, the scope of the economic impact of the Great Lockdown of 2020 is beginning to come to light.

As of May 8, U.S. unemployment has skyrocketed to 14.7% (numbers reflect as of mid-April). Now, you can argue all day long if this number is real and will get worse or if this number is artificial and will quickly drop when businesses reopen as stay-at-home restrictions are lifted.

Instead, let’s dive into what to do with this data as an investor.

The Current Population Survey (CPS) evaluates unemployment in the U.S. and has six levels of rates for unemployment (U): U-1 being the most strict to U-6, which includes measures of both unemployment and labor underutilization.

The reported 14.7% unemployment rate is actually the U-3 rate. The U-3 rate defines unemployment as “those who do not have a job, those who are not actively looking for work in the prior four weeks, and those who are available for work.”

Unfortunately, using this definition of unemployment may put rose-colored glasses on a much graver situation.

Related4 Ways Coronavirus Is Rapidly Changing the Economy (& How to Navigate Rough Waters Ahead)

A Case for Better Numbers

So how do you calculate true unemployment?

First, you have to calculate the labor force.

In a super simple world, the sum of employed and unemployed people makes up the labor force. Those who have no jobs and are not looking for one are removed from these calculations. This population generally consists of students, retirees, and homemakers (more on this in a second).

Therefore, unemployment is the proportion of unemployed people in the labor force. Meaning they are jobless, looking for jobs, and available for work.

But it’s not that simple…

Issue #1: The U-3 Definition of Unemployment Doesn’t Account for Special Situations

OK, if you define someone who is unemployed as not having a job, not actively looking for work in the prior four weeks, and currently available for work, how does this definition take into account other scenarios?

  1. What about a parent who has been unemployed for three months, but hasn’t been able to work due to a sick child?
  2. What about a parent who is unemployed for two months, who now has to stay home to care for a child who is unable to return to school?
  3. What about a parent who was laid off, contracted COVID-19, and can’t look for a job since they are contagious (or worse, ill and/or potentially infected their entire family)?

Unfortunately, these individuals would be excluded from the U-3 measure. However, they would be included in the U-6 measure of unemployment.

Issue #2: Marginal and Underutilized Workers Not Captured in the U-3 Definition

Then there is the issue of underutilization of labor. The U-3 definition of unemployment doesn’t account for those who fall into the following groups:

  • They believe no job is available in their line of work.
  • They have been unable to find work.
  • They lack the necessary schooling, skills, or experience.
  • They face some form of discrimination from employers (for example, being too young or too old).

In the case of this pandemic, entire job sectors have dried up nearly overnight, leaving many in a lurch on what career step to take next. However, it’s this last point that hits home from a social impact standpoint. Whether you like it or not, discrimination does happen in the workforce.

If an employer is faced with two equally qualified candidates, they very well can “mentally” eliminate one candidate based on them having kids to care for, an elderly parent to care for, or a personal illness themselves. And this mental gymnastics may keep many individuals from getting immediately rehired as we face additional shutdowns to control COVID-19.

Issue #3: Workers Leaving the Workforce Entirely

Leaving-workforce

As we climb out of the first wave of COVID-19, we have seen the disproportionate impact of this disease with 60.6% of deaths occurring in the 55+ age group. This age group also accounts for 22.1% of the workforce (as measured in 2017). Several questions arise:

  1. What happens when this population chooses to leave the workforce to better protect their health? Such an exit will greatly impact the GDP, and they will no longer be counted in workforce numbers.
  2. Also, can they safely leave the workforce to better protect themselves? One study in 2018 identified that 26% of females 65+ live alone.

As you can see, the U-3 definition of unemployment does not give us a clear picture of the true unemployment and underemployment, especially in the midst of a pandemic-fueled recession.

Putting Unemployment in Perspective

I don’t think anyone can argue that we need a better understanding of the true unemployment rate in the U.S.

Unemployment adversely affects the disposable income of families. When someone is unemployed, that worker consumes far less than someone with a steady income for the simple fact they have less discretionary income. That’s the hard cost.

But what if you are like many blessed Americans who have remained employed during this time (albeit struggling to juggle working from home, taking care of your family, etc.)?

Is Anyone Immune to the Impact?

The effects of unemployment are not contained to those that are unemployed. Unemployment also erodes purchasing power, diminishes employee morale, and reduces economic output. When over 70% of the U.S. economic output is a result of domestic consumers’ personal consumption habits, high unemployment is deleterious for all of us.

Related: Has COVID-19 Threatened Your Investing Confidence? Press On—Here’s Why

The Effect on Real Estate Investors

Like many investors on BiggerPockets, March, April, and May have been kind to my real estate portfolio with the lion share of my rents and distributions coming in. But as unemployment rates soar, I am not naive to the fact that my portfolio and the real estate market, in general, may be affected.

Here’s how I see real estate being impacted in the near-term:

  1. Purchase prices on homes may have to come down, as people have less money to buy or can’t qualify for larger loans.
  2. Rents may have to come down, as people have less disposable income to spend.
  3. Vacancy rates may increase with renters looking for more affordable housing. Some may even condense housing (move in with others), as they did during the Great Recession.
  4. Value-add investors banking on extra streams of income to increase their net operating income may need to adjust their expectations for the near future. This could affect cap rates and property values, as well.

Outlook for Real Estate in the Face of Unemployment

Should real estate investors be worried or optimistic? I am optimistic that real estate will survive even with climbing rates of unemployment for a number of reasons:

  1. I invest in a basic need: housing.
  2. I have months of cash reserves to strengthen my financial foundation and weather the storm.
  3. I understand that real estate is a long-game.
    • My units have plenty of cash flow cushion, so I could bring down rents to remain competitive in the market.
    • And if there is a temporary dip in asset values, I won’t lose money if I don’t have to sell.
  4. I have long-term, historically low 30-year debt on my properties, again reinforcing my position of not needing to sell because a rate lock or loan is expiring.
  5. And last, but certainly not least, there is a housing shortage, which will actually help create more renters—not less.

House with "For Rent" sign in front

Conclusion

As you can see, the unemployment rate as currently stated doesn’t give us the clearest picture of the actual unemployment and underemployment rates in the U.S.

Investors (including real estate) should brace for additional near-term deleterious effects on the economy, especially heading into additional waves of this pandemic. Here are a few ways I’ve prepped my portfolio for the coming months:

  1. Building cash reserves to six to 12 months to cover all expenses.
  2. Reducing maintenance and CapEx expenses to only health and safety items or to get a unit rented at a rent premium.
  3. Limiting turns on my portfolio for the next six months to keep good renters in place.
  4. Working with current tenants on lease amendments should they be experiencing an economic fallout (and have documented proof).
  5. Applying for the Economic Injury Disaster Loan Program for access to a low-cost loan to help cover expenses due to COVID-19.
  6. Ensuring my property management is on solid economic footing and has applied for the Paycheck Protection Program.
  7. Reviewing previous tax returns with a CPA for net operating losses that I can activate going backward. (The CARES Act now allows for these losses to be carried back five years.)

As you can see, regardless of knowing the true unemployment rate, there are many ways I can protect my downside and move forward cautiously as an investor.

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What are you doing to protect you and your investments during the pandemic?

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