NOTE – This post will likely only be part one of many posts discussing how COVID-19 will have an impact on real estate investing. As I see more evidence impacts on real estate, I will periodically write about how I think those impacts will play out.
Main Question for this Blog Post
How will COVID-19 impact the Single-Family Rental business?
I am writing this blog post in July 2020.
I submit that this is NOT the time to invest. At this time, I think it is prudent to wait about 12 months, give or take a few months, to start investing in Single-Family Rentals.
What we have seen so far
Since March 2020, we have generally seen demand for houses stay on trend, but a significant percentage of potential sellers deciding not to list their house for sale because they don’t want strangers coming into their house.
So, basically demand stays the same and supply decreases. Basic economics tells you prices will rise in this scenario. Also during this time mortgage rates have decreased further helping the demand side of the equation.
So, it’s no surprise that houses around the country are selling fast and often for more than asking price.
But will this last?
The federal unemployment benefit of an extra $600/week from the CARES Act is set to end in the last week of July 2020. As of my writing, Congress has not acted to extend this benefit for the same amount or even a reduced amount but still more than the states regularly payout.
In July, I am reading that unemployment rates in metro areas (or cities) are much higher than the national average in June. The unemployment rate across the U.S. in June was 11.1%.
However, in cities, the rate was much higher. New York was 20.4%. Los Angeles was 19.5%. Chicago was 15.4%. Detroit was 17.7%. Cleveland was 13.5%. Miami was 11.2%.
I think this makes sense. The job markets that were hit the hardest include restaurants, retail, hotels, bars, and other hospitality industries. These are primarily located in the metropolitan areas, not the rural areas.
When we invest in rental properties, nearly all of us are investing in metropolitan areas. So, this data tells me that unemployment is worse than generally publicized.
The question, to me, is how long will this go on?
To answer that question, we need to know how long the coronavirus will be around and how long the general population will be afraid to expose themselves to crowds. This goes to when will we have a vaccine that actually provides immunity and have enough produced to protect enough of the population to make it safe for people to resume normal activities.
I don’t want to get into all the science, but in general I’m reading that at least 60-70% of population needs immunity in order to stop the spread of this virus; that’s roughly 200-230 million people in the U.S. Some of the most promising vaccines need two doses. Usually early developed vaccines for novel viruses need booster shots every year because the early-developed vaccines don’t completely work. So, to sum all this up, I believe we will be dealing with the fear of being exposed in crowds for another 12-18 months taking us through 2021.
Therefore, there is a lot of evidence to indicate that we could remain in an economy with high unemployment rates (over 10%) for at least 12-18 more months.
So, if the government doesn’t continue to bail people out, we are going to see a lot of missed rent payments and a lot of missed mortgage payments and ultimately a lot of mortgage defaults.
This means there is a huge opportunity ahead for real estate investors.
Another Question: Who would get the vaccines first?
Likely those at most risk and highly valuable to society like certain politicians and healthcare worker. The highest risk population is the older age groups, so my opinion is they will try to get the older populations vaccinated first. I could be very wrong about this, but that’s my assumption at this time.
So, the age groups that are more likely to be renters, those under 40, will stay at risk longer and, therefore, have their activities impacted by fear for longer. So, the impact to the economy will last a long time.
Real Estate Operates on a Lag
Generally, impacts to real estate operate on a lag. When we have a recession, real estate is impacted afterward the recession ends or later in the recession. First, some people lose jobs. Then, some people stop making rent payments or mortgage payments. First, banks try to work with the owners to find some way to get paid. Banks don’t like to own real estate, so they do what they can to avoid foreclosing on homes. However, eventually the rate of foreclosures starts to increase. Banks will start to unload, sell at a discount, houses creating downward pressure on housing prices.
That’s when it’s best to invest. And this period will last a long time. Usually for a couple years.
Delay in Whole Process Due to Forbearance
The government imposed forbearance program for mortgagees has put a delay in this whole process. When the forbearance periods end, then we will start to see the impacts described above.
However, there will be a backlog and the numbers are so large that it will take banks a long time to work through this process and backlog.
So, When Should We Invest?
I submit, that we have to wait at least into 2021 and maybe even the second half of 2021. We need to see what the length of the recession really is and how long unemployment stays high and when people start to act like they are comfortable going back to life activities they enjoyed pre-COVID and ultimately what the magnitude is of the foreclosures and its impact on housing prices.
When we start to see answers to those, then we can start investing. And we will want to invest in as many properties as we can for several years.
Remember, there is a shortage of housing to deal with how much the household forming age groups are growing. That won’t stop. Those people were already born and live and will form more households and that is a lot of demand for housing.