Coronavirus Updates

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

Expertise: Mortgages & Creative Financing, Real Estate Investing Basics
40 Articles Written
Unemployment-rate

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.

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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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Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence. After purchasing her first rental in 2002, and hi...
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    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied 4 months ago
    Whitney, Well thought out and helpful article, as usual, I do have one correction though: The economic injury disaster loan is no longer available for anyone who is not in the agriculture business. I didn’t initially apply for an EIDL because I had not yet experienced a loss, since all of my units were rented and paying rent. Since then I have had coronavirus specific expenses (such as purchasing a CDC approved disinfectant to help reassure renters that they are moving into a safe space) when I went to apply for the loan, I found that it was no longer possible. So that is one source of help that is no longer available.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 4 months ago
    Glad you found value, Cindy. You are right, the EIDL is paused until further funding. Sometimes, when we submit articles, some things are changing so quickly it's hard to adjust ;)
    Kelly St Germain
    Replied 4 months ago
    Under Issue 3, maybe it's me, but naming people age 55 as elderly is bothersome. I am that age and I don't even view my mom, aged 78 as elderly. Just saying.
    Deborah Parks
    Replied 4 months ago
    Kelly I agree
    Susan Maneck Investor from Jackson, Mississippi
    Replied 4 months ago
    I don't think we can really know the impact of unemployment until August. That's when the enhanced unemployment runs out. My tenants who lost their jobs worked for schools and hopefully they will return to work later in the month. The real question is can they remain employed or will schools have to shut down again? Ditto with businesses because when schools and day cares close workers may have to stay home with their children. Or send them to grandma's house and then grandma dies. Right now if my tenants are behind in the rent it is because the state has been so slow to get their enhanced unemployment distributed. If they had it, then no problem, I'd get my rent. In Mississippi enhanced unemployment exceeds what most people earn. But if there is no help for them in the fall when the current assistance ends and the second wave of the virus hits, things could get really ugly fast. What I anticipate happening is that there will be regular stimulus checks but not in the form of enhanced unemployment because they no longer want to encourage people not to work. The Dems will probably get the additional stimulus checks in exchange for exempting employers from liability for Covid cases in their businesses. I have mixed feelings about that exchange, but I predict will happen. In any case, I'm more worried about the virus itself than what it might do to my rental income.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 4 months ago
    Agreed, Susan, things are changing by the minute! Having a solid mitigation plan is imperative. As far as number, it will be interesting how the government will count those who choose to leave the workforce right now to protect their health as under the current U-3 guidelines, they would be removed from any calculation.
    Michael Fish
    Replied 4 months ago
    Fortunately I applied early for the disaster assistance loan when it first came out. While the loan was approved about 11/2 months ago the funds have not been received. My wife who is retired has been busy making masks for all or our tenants which my son and I gave out about 3 weeks ago. As long as the unemployment and supplemental payments to our unemployed tenants continue we will be fine. But once that stops We, (my tenants ) and i will be in trouble. The people I really feel sorry for besides those who are sick, or worse yet have died, are those poor people who work at the meat and processing facilities. They can not afford not to work. As of 2 weeks ago there are considered critical workers. Less than 1 year Trump was raiding these same plants to deport them. No one is looking out for them, and because they are not US citizens they can not go to their congress men and women to ask for protection.
    George Menz
    Replied 4 months ago
    If they are in the US legally, they won't be deported.
    Roxanna Gholami
    Replied 4 months ago
    I agree with a lot of points mentioned above. However, I don’t think vacancy rate goes up. I believe a lot of home owners are forced to sell because of mortgage default. These people are more likely to look for rentals which in turn boosts the rental market...
    Vince Mayer Wholesaler from Arnold, MO
    Replied 4 months ago
    I don't see why rents wouldn't be paid if the unemployed are receiving more than when they were working. The only thing that makes this a doomsday scenario is if the politicians keep everything shut down. If there are no small businesses then unemployment and the production of goods and services will be a problem. I think they overplayed their hand and we will see another boom in the economy.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 4 months ago
    Correct,.... but that will only last for so long. I'm looking at the long term effects of unemployment :)
    Melissa Bains
    Replied 4 months ago
    Whitney do you have 10 or less loans? I am currently at 10 and am trying to figure out how to buy more with fixed rate 30 or 15 year loans
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 4 months ago
    I have more than 10 :). It's super challenging right now!
    Jose A Rivera
    Replied 4 months ago
    Thanks for the article, but almost 99% of all deaths ocurred in older people with mortal preexisting health conditions who were going to die most likely from those conditions. The small percentage of healthy people who died, less than a 1%, died because they had genetic defects in their immune system. This covid virus is weak and does not truly a danger to the health of healthy people, young or old. It's is the fear and the manipulation of those who created this virus that pushed the markets down. But real estate will continue to do well.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 4 months ago
    Agreed, and it's always wise to have a solid plan B ;)