Economy shrank at unprecedented rate - Effect on SFR Price
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Dan DiFilippoBusiness Member
Real Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votesIt depends on the region. And, of course, it takes a long time for this ship to turn around. For an array of reasons. I've always felt strongly that The Great Migration is at hand. I've written a lot about that on here. Anyone over 60 years old has probably been thinking critically over the last 6 months about their retirement. Many may have taken severance packages and simply not listed their house to move yet. But they'll be taking off as soon as this pandemic clears up and they can list safely. Remember, they live in the places where it is most dangerous to list - those reasonably dense suburbs that have been steadily getting worse. And they generally only live there because it's the area they've lived for work over the last 30 or 40 years. It's a massive population glut and they're going to be seeking to capitalize on high asset values and the artificially low rates that enable them while they last (the low rates are double-impacting, of course, as they facilitate the buyers buying their homes as well as they themselves buying their next home). They will be moving from these suburbs around the mid-size and larger cities (New York, DC, LA to some extent, SF, Boston, and more) and buying houses in retirement-friendly areas in Texas, Arizona, Florida, Nevada, etc.. These are reasonably strong credit buyers with equity in their existing high values houses seeking to buy in low cost areas. There is a lot of cash to be pocketed selling a $700,000 home with $18,000 taxes and moving to a $200,000 home of the same size with $2,500 taxes. So I think look for the areas in the south and parts of the west that are friendly to these buyers. I think Raleigh (and probably Charlotte to some extent - I don't know as much about it) was an early beneficiary of this move. But it's only been getting started. The boomers have to do this. Because they don't nearly have what they reasonably need to retire.
And then there are a whole bunch of interesting little things that put an edge on this. For example, consider appraisals. appraisals look back 3-12 months depending on the circumstances. What this means is that a desperate seller today could still be benefiting from home appraisals made before COVID was on anyone's radar. If the wave of desperate to sell listings goes on the market tomorrow, there won't even be any lower value sales yet for the appraisals to comp to. This is akin to a measurement used in finance called a moving average. Moving averages naturally dampen sharp changes in prices causing them to appear as smoother, but sustained changes instead. Trends. So there is a lot of market psychology involved in the determinations. But I think for sure we're going to see a lot of panic over the next 18 months. And not just in the real estate markets, but really throughout the entire world and in all theatres.
14 Replies
- 6yDan DiFilippoBusiness MemberReal Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
It depends on the region. And, of course, it takes a long time for this ship to turn around. For an array of reasons. I've always felt strongly that The Great Migration is at hand. I've written a lot about that on here. Anyone over 60 years old has probably been thinking critically over the last 6 months about their retirement. Many may have taken severance packages and simply not listed their house to move yet. But they'll be taking off as soon as this pandemic clears up and they can list safely. Remember, they live in the places where it is most dangerous to list - those reasonably dense suburbs that have been steadily getting worse. And they generally only live there because it's the area they've lived for work over the last 30 or 40 years. It's a massive population glut and they're going to be seeking to capitalize on high asset values and the artificially low rates that enable them while they last (the low rates are double-impacting, of course, as they facilitate the buyers buying their homes as well as they themselves buying their next home). They will be moving from these suburbs around the mid-size and larger cities (New York, DC, LA to some extent, SF, Boston, and more) and buying houses in retirement-friendly areas in Texas, Arizona, Florida, Nevada, etc.. These are reasonably strong credit buyers with equity in their existing high values houses seeking to buy in low cost areas. There is a lot of cash to be pocketed selling a $700,000 home with $18,000 taxes and moving to a $200,000 home of the same size with $2,500 taxes. So I think look for the areas in the south and parts of the west that are friendly to these buyers. I think Raleigh (and probably Charlotte to some extent - I don't know as much about it) was an early beneficiary of this move. But it's only been getting started. The boomers have to do this. Because they don't nearly have what they reasonably need to retire.
And then there are a whole bunch of interesting little things that put an edge on this. For example, consider appraisals. appraisals look back 3-12 months depending on the circumstances. What this means is that a desperate seller today could still be benefiting from home appraisals made before COVID was on anyone's radar. If the wave of desperate to sell listings goes on the market tomorrow, there won't even be any lower value sales yet for the appraisals to comp to. This is akin to a measurement used in finance called a moving average. Moving averages naturally dampen sharp changes in prices causing them to appear as smoother, but sustained changes instead. Trends. So there is a lot of market psychology involved in the determinations. But I think for sure we're going to see a lot of panic over the next 18 months. And not just in the real estate markets, but really throughout the entire world and in all theatres. - Investor · Charlotte, NC · Member since 2020 · 41 posts · 14 votes6y
Hi @Dan DiFilippo,
Thank you for the very detailed and informative reply!
This makes a lot of sense to me. Really appreciate it!!
Currently we invest near Charlotte and suburbs. We have built a team to work with us from wholesalers, lenders, realtors and contractors. Only problem to invest in other places is to build a team ground up. Just wondering which places near Charlotte will support this migration trend. - Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes6y
Originally posted by @Geetha R.:
Economy shrank at an unprecedented 32% annualized rate in the second quarter - the fastest pace on record and comparable only to events such as the demobilization following World War II in its severity.
But, single family residential prices are still going up. Where do you think the market is headed, especially in Charlotte and suburbs? What strategies you are following to ride the market out, if there is any crash?Charlotte is in what I've called for the last 5 years or so, the "Big 4" NC cities/MSAs. Along with Raleigh, Wilmington, and Asheville, Charlotte has seen price appreciation over the past several decades that put the city in the top ranks in the state and nationally. I've posted elsewhere on BiggerPocket with the data/analysis. The GDP drop was certainly expected by almost everyone, and everyone who cared to know realized in March that the country was headed for a vicious drop in 2020Q2 GDP. (Lots of post on BP about the 'new' recession.) Housing, unlike in the aftermath of the Great Recession (GR), is not to blame for the current crisis, which is on the history books as a failure of US leadership and not real estate related. In the big picture, housing should be a net beneficiary in this, potentially less intense and less prolonged, economic downturn. The downturn should be less than last time, which was 4 years or so. Last time we experienced significantly lesstimely government stimulus.
To answer your question, I'm not doing anything special regarding this economic downturn since it is not real-estate centric. I expect rents to stay roughly at current levels and vacancy and collection rates to mirror the last recession, the GR.My views are largely mirrored by American Homes 4 Rent, the largest landlord in Raleigh and Charlotte. See their last 10-Q, 10-K, and SEC filings. Note the lack of any 8-K filings related to Covid-19 specifically. Their last 10-Q says:
"The Company has also offered zero percent increases on renewal leases signed in April and May. New leasing activity continues without interruption, as the Company’s proprietary Let Yourself In℠ technology provides full functionality for prospective residents to tour homes, submit applications and execute leases while following social distancing guidelines, resulting in an April 2020 Same-Home portfolio Average Occupied Days Percentage of approximately 95.1%. Additionally, the Company collected 95% of April rents and collected 82% of May rents through May 5, 2020, which represents approximately 94% of rent typically collected during the first five calendar days of the month...."
As I said, this downturn is not because of real estate. Different animal this time. - 6yAdam SchneiderPro MemberLender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
@Geetha R. We won't know the true situation until after the government subsidies go away and the foreclosures re-appear. If not for those two government interventions, we'd have more inventory in the market and lower prices.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes6y
A quick look at Wake county S-TR filings shows almost no activity. That will change when things open up. Below are counts of recent weeks.... (sorry about the formatting)
week ending S-TR count June 5 6 12 5 19 4 26 6 July 3 4 10 3 17 4 24 6 31 6 Compared to January, which represents more or less 'normal' numbers:
week ending S-TR count January 10 22 17 31 24 19 31 20 - Investor · Charlotte, NC · Member since 2020 · 41 posts · 14 votes6y
Thanks @Chris Martin for sharing valuable information !
Really love the data you have provided. Thanks for your time and for providing your insight! (One quick question- What is S-TR filings ?)
- Investor · Charlotte, NC · Member since 2020 · 41 posts · 14 votes6y
Thanks @Adam Schneider! Yes, without government interventions we would be in a different situation. There are multiple variables affecting the real estate prices. Not sure how bad it is going to get when Government intervention stops/reduces..
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes6y
Originally posted by @Geetha R.:
Thanks @Chris Martin for sharing valuable information !
Really love the data you have provided. Thanks for your time and for providing your insight! (One quick question- What is S-TR filings ?)
NC is a trustee state, meaning the lender of a residential mortgage 'hires', assigns, and uses, a quasi-independent attorney in case the borrower fails to live up to the terms of the loan. Almost all residential lending in NC involves a deed-of-trust. Chapter 45 of the NC General Statutes (NCGS) covers Mortgages and Deeds of Trust in grotesque legal detail. Article 2 of Chapter 45 covers 'power of sale' and the legal aspects of foreclosure in NC. As a courthouse buyer, I followed the S-TR filings, or Substitute Trustee filings, as detailed in NCGS 45-10, Substitution of trustees in mortgages and deeds of trust. Virtually all foreclosures start with a S-TR filing. Hence, when predicting future foreclosures, a practitioner can (and does) use S-TR filings as a leading indicator of defaults in a county, region, area, or whatever.
At present, as shown in the data, banks (through MERS, primarily) are not filing against defaults. When this changes, I would expect a flood of S-TR filings since a lender will initiate legal action even if the default can be 'worked out', or cured, because statistically a certain percentage of cases will not get resolved and the lender will indeed (through the trustee) proceed to sale.
Anyway , a long winded answer that hopefully helps.
- 6yAdam SchneiderPro MemberLender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
@Chris Martin Do you think things will change in early 2021?
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes6y
Originally posted by @Adam Schneider:
@Chris Martin Do you think things will change in early 2021?
I would have expected the judicial system would allow cases to be filed and continued rather than not filed. So I'm expecting case originations to start soon, well before 2021. However, I would expect the foreclosure cases reaching the courthouse steps to remain low until 2021Q1 since the process takes months to complete even on easy/quick cases. There are only 18 HUD homes on hudhomestore in NC now with zero in Wake or Mecklenburg county. Not sure I've ever seen that before. The big foreclosure firms like Hutchens and Brock & Scott don't show a lot, but I expect that will increase roughly proportional to the S-TR filing rate.
- 6yAdam SchneiderPro MemberLender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
@Chris Martin. Please keep sharing your perspectives! Always insightful.
- Rental Property Investor · Charlotte, NC · Member since 2017 · 271 posts · 259 votes6y
Inventory has continued to be in very low supply, especially affordable homes. This is caused by a few trends but the most pronounced (in my opinion) are the facts that ~60 people move to Charlotte a day and almost all new inventory that is being built starts at $450k.
If you own houses on the affordable side, supply and demand are going to continue to push up the prices up.
Personally, I don't see us being able to build <$300k houses within the next 5-10 years and I also don't see the influx of people moving slowing down. - Real Estate Agent · Charlotte, NC · Member since 2020 · 47 posts · 35 votes6y
@Adam Schneider
I completely agree, that’s something I believe a lot of us are forgetting.
- Real Estate Agent · Charlotte, NC · Member since 2020 · 47 posts · 35 votes6y
@Jim Kittridge
Spot on! I live in the Plaza Mid wood area and we have 3/2 and 2/1 homes within a mile with little to no renovation going for 400-500k
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