Concerns about the economic impact of COVID-19 are real. And they’re scary, as the health and wellness of our friends, families, and loved ones are on everyone’s mind. So, here are the top things you should know about the coronavirus and real estate investing, including opinions from top financial experts.
#1 This Isn’t a Repeat of the 2008 Recession
Because it was the most recent recession, it’s only natural to compare what is happening with the coronavirus to the recession of 2008. However, all signs relating to the current financial concerns are nothing like the 2008 recession, nor the 2001 recession for that matter.
- The housing market was flooded with people holding subprime mortgages who couldn’t afford their homes.
- Lenders allowed zero-income verification loans with no cash down, forcing foreclosures when the market crashed.
- People were flipping houses two or three times per month based on anticipated rising prices.
- Builders were building new homes as fast as possible.
The housing market strength contributed to the 2005 – 2008 bubble. Many people thought, “Real estate always goes up; it never goes down.” Unfortunately, real estate prices dropped drastically, in some markets by more than 35 percent. Furthermore, in the past five recessions in U.S. history, home values actually appreciated in three of them.
For these reasons and more, savvy investors invest in real estate, because it is relatively stable compared to many other investments during an economic downturn.
#2 Working-Class Rentals Often See Increased Demand
During an economic downturn, renters may have less money to spend on rent, especially Class A rental property. But the fact remains that everyone needs a place to live.
While renters may move down in class, they generally aren’t going to go homeless. In fact, working-class rentals often see increased demand and increased rents due to renters moving into less expensive rentals, while homeowners also transition into rentals.
Another opportunity is college housing. Many people use a temporary layoff or furlough as an opportunity to go back to school. As a result, college rentals tend to outperform during an economic slowdown.
#3 What Can Real Estate Investors Expect in 2020?
While it is too early to make a definitive statement about how long the economic slowdown will last, we know that the U.S. economy was in a good place prior to the pandemic.
Real estate investors shouldn’t feel pressured into making snap decisions. History suggests there will be plenty of time to assess one’s options carefully, as we observe the pace at which the economy rebounds.
The Best Outcomes
If the coronavirus fades out quickly, we may see limited damage to the economy. Positive potential outcomes include:
- Only one or two quarters of “base recession,” with a strong second half of the year (2020).
- Equity markets quickly stabilize, and fears subside.
- Real estate prices remain flat and don’t drop more than one or two percent in the virus’ highest impact areas.
- Lenders stay involved in mortgage markets due to easy access to capital from the Federal Reserve and a moratorium on evictions and foreclosures.
- The labor market remains intact, with only a small spike in long-term layoffs and job losses.
- Pretax incomes stay flat instead of falling.
- Government stimulus checks to taxpayers will help stem losses.
- Interest rates remain lower for longer, bringing more real estate buyers to the table.
The Worst Outcomes
Unfortunately, due to the unpredictability of the virus, we can’t guarantee the best outcomes. Consider the following possibilities when planning an investment strategy:
- A protracted recession could last three or more quarters.
- Large spikes in job losses could lead to mass unemployment.
- Reduced hours and take-home pay limit consumers’ economic activity.
- Falling consumer confidence.
- An increase in vacancy rates will strain real estate investors without cash reserves, especially in hard-hit areas.
- A drop in new home starts may further reduce residential real estate activity.
- A rise in mortgage rates to reflect lender risks may lead to homebuyers pausing their new home search.
- Real estate prices fall by seven to ten percent.
Across most scenarios, it is anticipated that prevailing interest rates will remain low for some time. In general, the Federal Reserve has a harder time raising rates once it has lowered them.
#4 Experts are Optimistic
Windermere’s Chief Economist, Matthew Gardner, is optimistic. Gardner says the U.S. economy and housing market will “get through the COVID-19 crisis in relatively short order, and the economy will resume somewhat normal activity before the fall of this year.”
Since the end of the last recession in 2012, Gardner says, “housing is stable. I think it will continue to be stable. I certainly see no massive contraction ahead of us when it comes to the overall housing market. He went on to say, “We are currently in a health crisis, not a housing crisis.”
Danielle Hale, Chief Economist at Realtor.com believes that if there is a recession, “It will be different than the Great Recession. Things unraveled pretty quickly, and then the recovery was pretty slow. I would expect this to be milder. There’s no dysfunction in the banking system. We don’t have many households who are overleveraged with their mortgage payments and are potentially in trouble.”
The recent Goldman Sachs GDP Forecast indicates that although there is no growth anticipated immediately, gains are forecasted heading into the second half of this year and getting even stronger in early 2021.
These experts indicate that the financial impact of the coronavirus is a momentary event in time, not a collapse of the financial industry.
The Bottom Line
In times of uncertainty, one of the best things we can do to ease fears is to educate ourselves with research, facts, and data. With questions regarding an upcoming global slowdown, it’s essential to take an objective look at what has transpired over the years and how the housing market has successfully weathered these storms.
While we don’t know the full impact of the coronavirus on the housing market, we know that housing isn’t the driver. The reasons we move (marriage, children, job changes, retirement, and such), are still very much part of life. The New York Times wrote recently, “Everyone needs someplace to live.” That fact remains.
Graystone Investment Group
Graystone is an experienced Investment Group in the Greater Tampa Bay market. Our company is designed to help new and seasoned investors.
If you’re ready to dive into the real estate market, contact us. Whether the type of real estate investing you want to do is wholesaling, buy-and-hold, commercial investment, or fix-and-flips, we can help.