Is the Real Estate Market Going to Take a Hit – Or Not?
At the onset of 2020, most predictions had the housing market remaining strong throughout the year. In February, Open Door reported low unemployment, declining interest rates, and consumer spending on the rise, all indications of a strong economy – and equally encouraging signals for growing homeownership. We all know what happened next. The coronavirus pandemic hit, and by mid-March, much of the world was in lockdown. Contrary to much conventional wisdom during the heat of the panic, the real estate market did not follow suit.
At first, many real estate investors assumed that laid-off tenants would be unable to pay rent, landlords would default on their mortgages, and a massive tidal wave of foreclosures would follow. States and the federal government shared this concern and issued moratoriums on evictions and foreclosures, some of which are still in place.
As we arrive in mid-October 2020, "uncertainty" remains the watchword, and most market watchers say we are far from being out of the woods. Many real estate investors continue to feel the pinch as some tenants have not paid rent for several months. With potential evictions on hold, we have yet to see the complete fallout of restaurants and businesses running at 50% or less capacity.
The question on real estate players' minds is, "When is the real estate market going to take a hit?"
Recent commentary from property managers, real estate investors, and real estate fund managers offers a few clues about what they are dealing with now – and what they worry might be just around the corner.
What's different about today's real estate market than what led to the housing crash of 2008-2009? The implosion of 2008-2009 came in large part; as a result, the proliferation of sub-prime loans. Confident that housing prices would continue to rise, lenders competed to structure and offer ever-riskier loans.
Since then, lenders have tightened standards dramatically. Borrowers now need more cash for a down payment – and they also need higher credit scores and must meet specific income levels. While these new standards don't mitigate all the risk, loose lending practices do not seem to play into the real estate market's response to the pandemic.
What is the story of the real estate market for 2020?
Many local real estate markets in the United States are in a seller's market. The demand for housing remains much higher than the available inventory. This type of market is great for sellers and can even rush buyers to purchase at inflated housing prices. Such price inflation causes investors to look for deals off-market work directly with sellers to close transactions quickly.
Many still see an onslaught of foreclosures yet to come. With unemployment in many sectors continuing to rise and eviction moratoriums still in place, it's hard to see a clear picture for the rental market.
A look at a multi-page forum on BiggerPockets found investors all over the board with their predictions. Still, one trend was evident: many investors are getting ready to pounce on opportunities in the months ahead.
A few common threads:
Foreclosures are on the horizon.
With the growth in real estate prices over the past ten years, observers expect a correction in conjunction with low-interest rates. Many investors see a massive wave of foreclosures. Particularly in locations where the economy relies heavily on restaurants, tourism, and related industries, that foundation has been hit hard with few prospects for a rebound through the fall and winter.
In other markets, the drop might be less significant. Still, many businesses continue to operate at a low capacity because of reduced demand due to quarantines and lockdowns. This means even employees who still have jobs may earn less and be unable to pay all or some of their rent. In some cases, this shortfall will jeopardize the landlord's ability to pay the mortgage.
Markets continue to boom.
While the predicted flood of properties hitting the market due to foreclosure has yet to materialize, investors still have to pay higher prices for rental properties in a seller's market. However, looking at secondary markets might help. Real estate investors should consider researching a neighborhood within driving distance from the closest metro area and running the numbers. Investors might find a rental that they can buy with a good return and start building equity.
Investors agree – local economies are the key.
Any predictions for economic rebound need to be localized. Chicago may not perform the same way as Phoenix, which will not be the same as San Francisco. Investors are holding on and taking precautions. Some are preserving cash, while others are buying aggressively.
What's the best course of action now?
Seasoned investors agree that there are still definitely investment opportunities available, but advise tracking closely with local market conditions.
Rentometer reports for Chicago, Phoenix, and San Francisco tell the tale about current rental rates and market conditions in each area – and reveal the track record for the past nine months.
Chicago: This is an averagely priced 2-bed, 1-bath unit, offered at a reasonable rate for the area. Dig deeper, and you'll see a historical trend tells a different story.
According to the report, the average monthly rent in January was $2,096. This rate then fell to $1,825 in April and rebounded slightly in September to $1,922. Looks like something of a wild ride in windy Chicago.
Phoenix hasn't wiggled off the hook either. Here is another standard 2-bed, 1-bath rental unit with reasonable rates for the area. Over the past year, however, Phoenix has followed a similar route to Chicago.
The average rent in this area for January was $1,353 a month. In April, rental rates declined slightly to $1,299, and by September, the average rent was only $998. That adds up to a $355 hit in monthly rental income since the beginning of the year.
The story reported for California doesn't sound pretty, but do the actual numbers reflect such distress? In San Francisco, the current average rent for a 2-bed, 1-bath property is $3,500. January rates were slightly lower, at an average of $3,409. April rates dipped to $3,261, but unfortunately, September is the worst to date at $3043 rental average. (Almost a full $500 less per month than what the numbers say about the current rental rates.
Overall, landlords are adept at making adjustments for their losses. Evidence across three markets shows that 2020 has seen declines in actual rental rates charged to tenants. You can be sure we'll be watching the numbers to see what this story looks like come year's end.
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