The Northeast real estate market to start off 2020 is being marked with tight inventory, high prices, and the fear of rent control measures.
Massachusetts Real Estate Market
Despite COVID-19’s impact, the Boston housing market is set to resume being among those strongest in the nation. Ranking as the “second-most recovered” of the Top 50 US Metros as of mid-June, according to the Boston Globe, the metro has benefitted from continued development in the Tech sector, as well as a strong COVID-19 response. Additionally, Realtor.com reports that the median sales price is up ~10% from a year ago despite the pandemic. Elsewhere, the Boston Herald reports sales prices up around 12% in April 2020 from April 2019, despite the state being at the height of the crisis at that time. This likely could have been precipitated by an even tighter demand that same month as inventory dropped. One point of note; as the college-heavy city awaits further information about the Fall semester as the coronavirus continues its spread, inventory otherwise leased by college students may become available, easing the financial burden on those interested in living in the city.
Proximity to hard-hit New York has been a blessing and a curse for Connecticut. Primary owners face the quagmire that is the state’s fiscal nightmare; rents have long faced a rent-burden, with more than half the state’s population paying more than 30% of their income towards rent, and over a quarter paying over 50% of their income towards rent, per The CT Mirror. Home to many individuals now staring down the barrel of corona-related unemployment, it is unlikely that relief will be coming before the state’s moratorium on evictions expires. For owners with delinquent tenants, it may be hard to replace these losses as the unemployment rate continues to spike. However, for those who can still claim employment, the lockdown orders in New York have driven many out of the city. Lawrence Young, the chief economist for the National Association of Realtors, predicts a “V-shaped” recovery. Demand has spiked- the United States Postal Service has reported than over 10K people registered a change of address from NY to CT since mid-March. In June, as the state began to reopen, the average sales price of an SFR in Fairfield County increased 17%, per the Ridgefield Press from the same period the year before. As the state begins its recovery, it is likely that these numbers will continue their upward trend, particularly in commuter-friendly areas.
New York Market
New York is decidedly a tale of two regions in the coronavirus era: one that tells of Manhattan and the boroughs, and one that tells of the suburbs.
In the boroughs, two decades of revival appear to be coming to an end. In mid-March, NYC became the virus epicenter, grinding all real estate, including construction, ground to a halt. In early June, the City began entering the phased reopening of the state, but the damage continues. Landlords are among the worst-hit groups; 2/3 of residents of the city rent, and with ~1M unemployed (New York Times), landlords are stymied with their own bills. Millions of delinquent tax dollars at a time when the city is staring down a shortfall to cope with corona-related costs. This could get worse as the Tenant Safe Harbor Act has been put in place to prevent evictions of jobless tenants, but without the corresponding mortgage assistance of landlords at a time when large sectors of the economy (tourism, indoor dining, theater, hospitality, etc.) have no estimate of a return to “normal.” A quarter of the City’s renters have not paid rent since March. Compounding the problem, rents are plummeting as people break leases and leave the city for cheaper, less dense options as an acceptable of “work-from-home” culture grows (Bloomberg). The impact of the virus also comes on the heels of the last two years of capped mortgage tax deductions put forth by the Trump Administration. For current investors and would-be investors, it could appear to be a long slog if the economic impact of the virus continues to fester.
By contrast, any delay in the market caused by the shutdown has resulted in a huge spike in business with the warm weather. Throughout the Hudson Valley, inquiries and offers on homes have quadrupled in some places. Demand has increased for homes with outdoor space, particularly for entertaining in a socially-distanced manner, rooms for gyms and offices, and larger kitchens—all areas that saw shutdown or were lacking during the city’s lockdown, and practically unfathomable in-home amenities in NYC. The demand is so great that even the luxury market is seeing leaps; in Westchester, contracts for homes priced at over $2M jumped ~40% in May 2020 from May 2019. On Long Island, residential closings are up ~34% (Riverhead News Review). Additionally, prices across Nassau and Suffolk are skyrocketing as demand increases with the threat of another potential lockdown looming. Inventory remains tight, so now might be the time for investors to sell, or landlords to raise prices as the urban flight continues.
New Jersey Real Estate
New Jersey, like it’s neighbor, was severely impacted by COVID-19. With the demand from people moving out of the city to commutable suburbs, the state is seeing a boom in housing demand. About ~70% of would-be buyers in April 2020, at the height of the state’s battle with the disease, were looking for “suburban homes” (Wall Street Journal). With the increased demand, it may be hard to find a home to afford; SFR prices are on pace to see the largest price increases since 2005, prior to the so-called “Great Recession” (Bloomberg). Prices are up nearly ~9.5% from the same period in 2019 (NJ 105.1). In the counties immediately surrounding NYC, Bergen, Essex, Union, and Middlesex, Otteau Valuation Group sees the trend continuing, and predicts the largest annual price increase for SFRs in a whopping 16 years. For investors who have retained inventory in the area over the last several years, 6-12 months may be the sweet spot in terms of timing, if looking to sell. For those who have SFR for rent, rent increases are warranted, as people are desperate to increase their space after being indoors for the better part of four months. This is particularly true in that SFRs can be as much as quadruple the size of a two-bedroom apartment in Manhattan for roughly the same price. In either scenario, investors in NJ will stand to profit big time in the coming months and years.
Rhode Island Local Market
Despite facing similar issues to its northeastern neighbors, Rhode Island’s median multifamily reached new highs in May 2020- a 14% increase from May 2020. With a strong investor-driven market in the pre-COVID era, sales plummeted during the pandemic, which is to be expected as investors seek to retain their property. Again, legislation in Providence, in particular, to prohibit the eviction of delinquent tenants may continue to be an issue, but proximity to Boston and a studier economy should leave investors more willing to explore opportunities in Rhode Island, as opposed to elsewhere.
New Hampshire Real Estate
Inventory continues to remain problematic in New Hampshire. As of May 2020, inventory is down 40% from the prior year, with most would-be sellers citing the pandemic as a deterring factor (Coldwell Banker). Sellers are resistant to the idea of strangers in their homes during this time, as well as the uncertainty of what the market will bring, resulting in “historic” lows. As a consequence, available inventory is lasting for roughly only ~50 days on the market. Something to keep an eye on in NH, as well: a potential piece of legislation that would keep delinquent tenants and homeowners out of eviction after the state’s emergency order is lifted. It would prohibit tenants in 5+ units from being evicted if they have fallen behind on payments during the state of emergency, unless the tenant fails to comply with a six-month payment plan, excluding late fees. This would further burden already-strapped landlords, many of whom are struggling to make ends meet and working with out-of-work tenants, while basic utilities increase, such as water and electricity, while people have stayed home.
Maine Real Estate Market
Maine’s affordable housing crisis has only been exacerbated post-corona as unemployment sweeps through the state. Owners can begin eviction procedures 60 days after the state’s emergency order expires, and it is set to do beginning in early August, barring any additional legislation or executive orders. In a state facing a massive inventory crunch pre-virus, it remains to be seen what additional measures potential investors can take other than to avoid Maine for the time being. Opportunities will remain slim, and as unemployment continues to grow, it’s unclear how many of the ~42K renters in the state will be able to make payments (Maine Beacon). Even if opportunities arise from foreclosures as a long-term consequence, it’s unclear how things will shake out as of yet.
Pennsylvania Local Market
Pennsylvania’s real estate market has returned full-bore despite much of the state’s real estate professions being shut down between April and the end of May. According to the West-Penn Multi-List, home sales are up 10% in May 2020 over the same month last year; prices are up 13% from the same time period. With market conditions generally being more affordable in Allegheny and other western counties as opposed to their eastern counterparts, buyers might be ready to take the leap, aided by low-interest rates and an increase in savings rate from 8% in February to 33% in April, per PNC. Philadelphia has not lost its edge, either. In April, inventory reached a 10 year low, despite massive unemployment numbers as the city issued stay-at-home-orders. Redeployment of funds (say, from a canceled wedding into a down-payment); New Yorkers leaving the ravaged five boroughs; and taking advantage of local tax abatement ordinances are among the dozens of reasons that CBS lists as to why Philly has picked up where it left off in late March—with a red-hot market.
If there is one defining factor of the second quarter of 2020, it would be coronavirus. It has impacted the market in every single facet, from rental to commercial to residential. In some areas, the market has already begun to rebound as the worst of the virus has passed; in others, the damage is longer-lasting; in still others, the slowdown is just beginning.
How are Housing Prices?
Across the board, CoreLogic expects home prices to drop in the United States by ~6.6%, the first decline since the recovery of the Great Recession began in 2012. Though the market has been slowly recovering thus far, spurred on by a strong desire to push out of the cities and hotspots, those numbers will likely be driven down by forthcoming delinquencies that stem from continued unemployment. The Federal Reserve cutting interest rates are unlikely to significantly have long-lasting effects to spur the housing market forward, however, as CoreLogic anticipates that the expected decline will begin in mid-summer, as the initial wave of sales following the first wave of the virus begins to slow down.
What About Mortgage Payments?
Further evidence of this is seen in mortgage payments, or lack thereof. In May 2020, total borrowers who were 20+ days in delinquency topped 4.3M, a record (which broke the previous record, set in April 2020), per Black Knight. More than 8% of homeowners were in some sort of foreclosure of delinquency, marking the highest such number since November 2011. While these figures do include homeowners who are in payment plans or forbearance, the number is also expected to go up at the end of July, when the additional $600 monthly federal unemployment stipend expires. Leading the top of the list of states with the most homeowners in delinquency were Louisiana and Mississippi, New York, New Jersey, and Florida. While NY and NJ struggle to recover as the former national epicenters of the virus, Florida and other states like Arizona, Texas, and California are looking to extend or re-enter lockdowns, meaning that the 40M people who filed unemployment in e. June will likely rise, adding to the snowball effect.
How Are Rental Markets Fairing?
Renter-heavy metros such as San Francisco and NYC are not immune to the real estate woes. With renters out of work and states enacting legislation to prevent evictions, on top of already-strict eviction procedures, landlords are seeing their bills skyrocket and income evaporating. Politico reports that 25% of renters have not paid anything since March, which is particularly harmful in high-cost states like NY and NJ. Between dealing with delinquent tenants and vacant apartments from lessees who are fleeing the cities for the suburbs, rents are declining. Six of the top 10 most expensive rental markets (SF, NYC, Boston, San Jose, Oakland, DC, LA, Seattle, Miami, San Diego) reported at least ~1% drop in rents; in SF, that number was ~11.6% (Wolfstreet).
The housing market may actually end up looking like a “W” recovery, per CNN, as potential second lockdowns, new spikes, and high levels of unemployment continue. The market will likely shape itself around the pandemic, but uncertainty abounds. Yes, flipping is strong, but who will buy? Investments are normally a good bet, but will tenants be able to afford rent? In any event, it seems likely that the market is unlikely to stabilize before the pandemic comes under control.
East North Central Market: IL, OH, WI, IN, MI
Illinois entered 2020 as one of the weakest housing markets in the country due to outstanding tax, pension burdens, and political turmoil. The coronavirus could make the situation even worse, potentially doubling the number of mortgage delinquencies in the state (Illinois Policy). Nearly one in four citizens are out of work, and almost three-quarters of a million jobs were lost. It is likely to compound the state budget issue even further; any investors are smart to ignore potential opportunities, even those popping up in Chicago. The nation’s most stringent stay-at-home orders have led to a slowing of virus spread and the faster reopening of the city, and, in turn, increased sales activity for SFRs, multifamilies, and condos across Chicago.
Columbus began the year as one of the strongest markets in the nation, and remains on pace to be one of the fastest recovered markets, as well. One of the lowest infection rates in the country, plus historically low-interest rates have spurred on buyers, particularly those looking for SFRs in the suburbs of Columbus, with yards, pools, and space- vital in a pandemic when social distancing is the name of the game. With sale prices routinely going higher than the asking price, via New Era Real Estate Group, any foreclosure or short-sale opportunity may be a strong option for investors for a quick flip.
Despite remaining relatively unaffected with COVID cases as opposed to other states, Wisconsin has similarly been impacted by the pandemic with tight inventory. Home sales have declined 20% since approximately since May of last year, and prices have skyrocketed (WPR). Complicating matters, building permits are down 36% for residential projects as of April 2020 (The Daily Reporter). For individuals in the market, any chance to purchase 1-4 family properties that may newly come on the market could yield dividends, particularly as apprehension abounds while people wait to see what the long-term pandemic impact will be.
Strangely, Indiana’s market has remained relatively untouched, according to the Greater Northwest Indiana Association of Realtors, with less than a 10% drop in sales, per the Chicago Tribune. Conversely, sale prices jumped ~13%- but still remain affordable, topping out at ~$180K, well lower than other parts of the country, making the state both a buyer’s and a seller’s market. The close proximity of the area to Chicago (just an hour away), makes it an ideal stepping ground for individuals looking to escape Illinois, yet can still commute and/or work remotely for jobs in the city- not to mention the lakefront location. Investors might make a killing here in Indiana, as opposed to tightened inventory, higher prices, and employment issues in other eastern states.
For years, optimists have seen reason for hope in smaller properties in the city proper area of Detroit, with housing sales down 70% (The Detroit News). The pandemic has largely ravaged the city’s economy, still, centrally build around a few token industries without much diversification. Stay-at-home orders put millions of jobs at stake, and as any smart investors know- investment should follow the jobs. By contrast, throughout the rest of the state, there has been a housing boom. The Greater Metropolitan Realtors Association has seen nearly double-digit mortgage application increases. With reasonable prices, Michigan, likely Indiana, could be another area for flippers to focus on in the coming months.
West North Central Market: IA, KS, MO, NE
The “Silicon Prairie” is helping Iowa rebound through the housing market woes facing the rest of the country. A stronghold for millennials due to an influx of tech jobs and affordability, combined with the quality of life, over the last few years, that trend has only increased with the rise of COVID-19. Tech jobs are famously flexible, allowing workers to be able to work remotely- and from anywhere in the country. With major millennial metro areas such as Florida, NY, NJ, and California seeing massive spikes in virus cases, and more countries transitioning to remote work, places like Cedar Rapids are continuing their increase in popularity. With the average home price in the region clocking in at just $170K (NAR), and the flip or rental purchase could be a steal for would-be investors.
The market is Kansas has been strong, led by a robust burst of activity in Wichita. Interest rates in the area are as low as ~2.85%, but there are only 1.6 months of housing inventory left on the market; in a balanced market, there is 6 months’ worth of homes available. For investors who are used to homes on the east or west coast to be significantly more expensive, an investor picking up a property for roughly $200K, as-is, and adding repairs can easily pay dividends, as properties are going fast, over asking price, and receiving multiple offers in days after showings—all for less than half the cost in other markets.
Nebraska has maxed out at less than 800 COVID-19 cases to this point in the pandemic, making it one of the least impacted states in the country. As a consequence, it’s strong housing market has continued to keep pace. Low-interest rates are spurring applications, and inventory is up ~23% in the closing of the second quarter (House Canary), making moved abundant. While the commercial sector is coming to a screeching halt as companies look to shut down permanent offices and go to remote working full-time, would-be buyers are going to look for larger spaces to isolate work life and home life away from a traditional office. In that case, Nebraska may look to get even hotter in the coming weeks and months.
Virus cases are piling up around the south at the present, but even so, Missouri’s market continues to be strong, particularly in the St. Louis-Metro area. Home sales were only down between 3% and 6% in March and April, respectively, from those same months in 2019 (St. Louis Realtors Association). The area has not been hit as hard by the virus, admittedly, but the governor of Missouri also deemed real estate services “essential,” so while much of the region was staying at home, the market continued onwards. St. Louis suburbs also reported strong demand for occupancy permits throughout the early months of the pandemic. The National Real Estate Investors Association says that with starter homes going for less than $200K a year, and older folks downsizing, the opportunity is available for investors to scope out homes and spruce them up for profit or rent to meet increasing demand.
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Coronavirus has impacted California’s housing market in such a way that housing sales are the lowest levels since the Great Recession (PR Newswire). May’s numbers were down over ~41%, and year to date, the sales are down ~13%. Fifty of fifty-one counties in the state reported year over year losses in sales, while thirty-one of those fifty-one counties reported a year-over-year price increase. California is already facing a staggering housing affordability and homelessness crisis; a prolonged period of unemployment will make matters even worse. Areas of bright spots appear to be Riverside and San Bernardino County. Sales in this region are up ~20% from 2019, and the “Inland Empire” has been a mecca for emigres from the LA/Orange County area; the population has increased ~230K, over the last five years. Now would be the time to strike in the region, even with the threat of virus cases spiking.
As the summer months heat up, New Mexico’s market looks to be lethargic. The number of housing sales and price increases from 2019 to 2020 is inconsequential, even as the national economy stayed strong throughout the earlier part of 2020 and the end of 2019. Much of that can be attributed to a dearth of inventory- a whopping 40% less than this time last year, via GAAR. With cases spiking over the southwest, it may be a while before any activity continues to progress in the state.
The coronavirus epidemic in Texas slowed the market in the spring and now threatens to upend the market in the worst setback since the 1986-1990 recession (Texas Real Estate Center). Despite being an “essential business,” SFR construction permits have plummeted ~22%; sales declined almost ~18%. An even bigger warning sign: despite historically low mortgage rates, mortgage applications are down nearly 29% on the year thus far. The TREC also predicts that “activity is expected to worsen.” These dismal figures exclude the rental market, where, “disproportionate job losses occurring at the lower end of the earnings spectrum which primarily consists of renter households.” Texas has been hugely successful in the last few years between new build construction and resales, and a go-to for investors. However, as some states are starting to see the coronavirus come under control, July has begun to batter the Lone Star State, setting new records for daily cases every day. These numbers will likely get worse before they get better.
Markets in Colorado have been largely untouched by the upheaval in other parts of the country. Realtor.com ranks the Colorado Springs market as the hottest market in the country for the third month running. One of the shortest lockdowns in the nation, ending on May 9, 2020, has helped the market stabilize more quickly than other areas. While home sales are down 15%, median home prices are stabilized, leaving ample room for opportunity- listings are up 53%. Colorado has recently seen a boom in millennials flocking to the market, who are rapidly aging into homeownership. Single-family residences for a modest price that can be flipped will provide an opportunity.
Realtors are reporting a rush of interest for Montana real estate, specifically from out-of-state buyers. Upon entering Phase 2 of reopening, a deluge of buyers from “urban areas” looking to escape city life aided in the spike of home prices in areas of Bozeman and Whitefish. The Montana Regional MLS reported a median sales price of homes in western Montana was ~$282K, and increased by ~$6K in just 5 months. While areas around Bozeman remain expensive, if properties are available for foreclosure, or at auction, it might be an opportunity for a quick flip as people look for a second home escape, especially if the predicted “second wave” of COVID-19 happens.
Wyoming is seeing a bit of a so-called “COVID Comeback.” Low taxes and a low population have resulted in increased demand in the area as people look to leave cities, and the state’s affordability plays better than more expensive neighboring Colorado. According to American West Real Estate, the market as exploded; the company manages ~350 rental properties, with ~20 vacant on average. Following the pandemic, they are down to just ~5 vacant properties. As more companies move to work from home, it may be worthwhile for some investors to test the market- sprawling rivers, national parks, beautiful landscape, low cost of living, all may conspire to benefit the situation.
COVID-19 cases are spiking across the south, but investment in Oklahoma City, specifically, remains strong. As the seat of state government and major corporations: AT&T, Sonic Corporation, The Boeing Company, The Hertz Corporation, United Parcel Service, Johnson Controls, MidFirst Bank, and American Fidelity Insurance- all businesses unlikely to be impacted long-term by the virus. With a strong economy, a booming homebuilder market adds credence to the thought that the market may rebound quickly. One caveat; a booming market may hit a backlog as it looks to reboot following several weeks of backlog during the shutdown, so low numbers over the coming weeks may belie the stronger long-term numbers.
Pre-pandemic Louisiana was a no-go zone with rising unemployment and a limited economy. That fact remains in the post-COVID era, too. Unemployment in New Orleans in May topped out at 24%, and evictions are over ~5%, nearly double the national average. LA has ended its moratorium on evictions, and federal unemployment ends at the end of July, meaning many more individuals will likely end up homeless. Increased unemployment makes even New Orleans anathema for investment with the lack of prospective employment for renters or buyers.
Similar to West Virginia, the rental market in major metros of Alabama has been impacted with the uncertainty around the university sector despite the college-going full-steam ahead with the new school year, particularly in places such as Birmingham and Tuscaloosa. However, that change in traditional tactics is leading to an unexpected strength for the condo and apartment market in the state. Given the record-low interest rates and affordability, roughly ~$100K or less, it makes a negligible difference for parents to purchase condos and apartments for students. Two additional positives that are adding to the calculus: a student alone in a condo limits the exposure to coronavirus in a crowded dorm, and residency lowers tuition. Smart investors might be looking at either buying condos to rent, or, if nothing else, staying out of the larger rental market in college towns.
While many other states on the east coast stayed inside for much of the late spring, Florida was business as normal, but the end of the second quarter has brought a typhoon of infection rates on the Sunshine State. As federal unemployment is set to expire at the end of July but businesses, beaches, and the all-important hospitality industry close, a wave of foreclosures are expected, per the Sun-Sentinel. One million jobs, or 14.5% unemployment, in Florida alone have been lost to the pandemic, and that was even before the huge volume of cases. Within a year to 18 months, there could be a 10-20% decline in house values. As the long-term recovery from the virus, and economic impact, continues, investors should look to this time frame to start making moves for foreclosures, auctions, and short-sales to make the most of the turn-around.
Maryland offers a glimpse of the new normal in terms of what buyers are looking for in the post-COVID era. A strong fall/summer is likely after a weakened spring of stay-at-home orders. Buyers are looking for increased space; 30% of respondents are looking for a home office, and over 60% of respondents to a survey by Bright MLS found their new home via virtual tours/showings. Other requirements: 26% required a larger yard, and 21% for a “less dense” neighborhood, indicating that Maryland’s suburbs are going to start to see increased activity.
While spring is normally the busy season for the housing market, the lockdown has delayed, but certainly not halted the 2020 season in Washington, DC. As lockdown eased in the nation’s capital in early June, home sales resumed and began to outpace the weekly metrics of 2019; March’s numbers were already doing so before the lockdown order went into effect, and the market has picked up where it left off. Strong prices and continued economic redevelopment in outlying neighborhoods have helped, as well. As of May 30, the market is at 74% of 2019’s volume by the end of May, per Urban Pace, and looks likely to get back on pace for the year sooner than later.
Delaware has seen a surge of inventory, and the market is decidedly misaligned at the moment, via Million Acres. Delaware saw a ~17% increase in inventory. Despite a ~12% decline in demand. Delaware’s relative proximity to the major cities in NJ, DE, and NY, plus suburban living will likely result in higher demand as the market stabilizes. Any market where inventory outpaces listings is a buyer’s market, and investors can stand to see long-term gains here.
Next Advisor reports that the single most expensive monthly cost for Americans is housing; given the loss of income and contracting job market, Americans are looking inward- as in, towards the middle of the country. Northwest Arkansas is one of the markets that is looking strong for investors in the long-term. Corporate bases of companies like Walmart and Tyson, as well as the university sector, provide employment opportunities, and affordability is 12th in the nation. It could be a strong play to invest here this year.
Home sales rose ~20% in Atlanta in the first week of June, evidence of a “pent-up demand” as the economy slowed during the initial wave of the virus in the spring. Sales are up 6% from January-June, 2020, as opposed to the same period in 2019. However, it bears watching how the situation will continue to unfold as Georgia writ-large struggles to contain soaring case numbers (even the mayor of Atlanta tested positive for coronavirus in early July 2020) (Atlanta Journal-Constitution). Effective Mon., July 6, the city shut down again to combat resurging cases, likely putting a pin in much of the activity for at least a few weeks.
Eastern Tennessee is seeing a positive impact from the coronavirus epidemic. A seller’s market, prices have gone up by ~6% as demand increases. With interest rates the lowest that they have been since the 2009-2011 post-recession era, it stands to be a strong market for the short-term for Tennessee (ABC 6). Given the demand for the market, it would be best to stay away for investors- not just because deals will be difficult to find, but with a small spike in cases in the south, the market may be put on pause.
If Lexington’s June numbers are an indicator for the rest of the state, it stands to be a strong rebound for the state writ-large. The Pending Home Sales Index, a predictive tool for home sales based on contract signings, increased from ~44.3% to ~99.6% in May in Lexington- the largest month-over-month gain in the index since National Association of Realtors began measuring such data. With a slower spring, it looks as though the sales cycle will be pushed into summer and fall.
It is unsurprising that after cities bore the brunt of the virus cases, demand for suburban living has skyrocketed. One surprising location, however, is the suburbs of Columbia, SC. Eight of the top ten suburban metros in the country experiencing interest are in the south; at the top of the list were the suburbs of Columbia. Approximately half the zip codes in the area saw a ~42% increase in listing views (realtor.com). Additionally, the demand on the market is sure to remain strong with the combined proximity to For Jackson and the University of South Carolina. With a median home price at about one-third the national average, the area is ripe for opportunity.
North Carolina’s COVID-19 impact is being felt significantly in the multifamily development sector. In Raleigh and Charlotte, multifamily construction continued as an essential service, albeit with a few adjustments: increased size as home space becomes a priority; no-touch doors and elevators; increased outdoor spaces; maintenance accessibility without entering units, and increased space between user areas in co-living space such as gyms; or even substitution for common spaces, such as outdoor exercise areas and spaces (Triangle Business Journal). Developers seem to be keeping in mind that the work-from-home efforts will continue long-term, and the adjustments will likely become larger trends throughout national developments.
Virginia has been a massive push towards not only suburban but so-called “rural” living. According to Virginia Realtors, reported ~76% of respondents planned on focusing on rural areas; ~56% were looking at suburban areas; and less than ~2% thought cities would resume as the focus (Inside NoVa). The focus seems to be transitioning to action: homes are on the market for around ~38 days, which is ~9 days less than the average for the same period of 2019, despite a decreased number of sales. Like much of the rest of the nation, it appears that the market is being delayed into the summer and fall months.
Coronavirus has altered education significantly, which in turn has impacted the multifamily rental market in West Virginia. One of the largest industries is West Virginia University, with its ~29K students and faculty making up a large demographic for the rental market in Morgantown. Normally, a large swath of the market is full for the following year from the previous December; however, landlords are reporting significant delays in filling their units as COVID causes educational upheaval. Universities are grappling with having campuses full for the start of the year, or facing a mid-year shutdown again; as such, many students are looking to continue education online or delaying signing leases for the time being. As such, a strong and consistent sector of the rental market is suddenly shaky.
To view all of Sharestates’ open real estate investments, click here.
We all know that the COVID pandemic didn’t hit every town with equal force at the same time. So it’s no stretch to conclude that not every town will be impacted in exactly the same way by the economic fallout from the health crisis.
And yet, it’s likely that the communities that are most affected financially aren’t necessarily those that were most devastated by the virus itself. And, while we’re still a long way from recovering from either the disease or the cost of its treatment, there is some predictive analytics that suggests where landlords might have the most trouble collecting rents until both have run their course.
Most at Risk Communities
ATTOM Data Solution released a report ranking U.S. housing markets by their vulnerability to the impact of the COVID pandemic. At the time of publishing this blog post, the ATTOM Data Solution report showed that the Northeast has the largest concentration of at-risk counties, while the West and Midwest have the smallest.
That isn’t surprising. But when you drill into the county-by-county breakdown, it’s not what you’d expect.
Granted, Sharestates is based in and around New York City, so our view might be skewed. Still, the media has appropriately dubbed our town the “epicenter” of the global outbreak, and we venture to say that most people’s enduring image of 2020 to date is some photo of Times Square with nobody in it. But New York County, a.k.a. the Borough of Manhattan isn’t on the list. Bronx County, with the highest proportion of people testing positive in the country and maybe the world? That isn’t either.
Instead, the report reveals that housing markets in 14 of New Jersey’s 21 counties are among the 50 most vulnerable in the country to the economic impact of the novel coronavirus. But the truly bizarre finding is that the second-hardest hit state is Florida, where 10 counties are among the Foreclosed Fifty. In other words, two states account for almost half the potential damage.
And can you think of two states with responses to the pandemic that is more different? In the Garden State, nobody leaves their front yard without personal protection equipment, and, frankly, there’s nowhere to go. In the Sunshine State, hosting spring break seemed at the time to be more important than protecting public health. In the former, decorative masks from Etsy boutiques have become fashion statements. In the latter, a lack of any mask has become a political statement. Granted, New Jersey has been far harder hit, so there is more of a consensus there about the danger just because the danger is more obvious — by an order of magnitude.
ATTOM ranks counties based on an algorithm that factors in the percentage of housing units receiving a foreclosure notice in Q4 2019, the percent of homes underwater in Q4 2019, and the percentage of local wages required to pay for major homeownership expenses. So let’s be clear: This model is predictive. It suggests which communities were most at-risk in the months prior to the pandemic — the ones that were most vulnerable to some disruption or another in early 2020.
Getting Granular On The COVID Impact
“It’s too early to tell how much effect the coronavirus fallout will have on different housing markets around the country. But the impact is likely to be significant from region to region and county to county,” said Todd Teta, ATTOM’s chief product officer. “What we’ve done is spotlight areas that appear to be more or less at risk based on several important factors. From that analysis, it looks like the Northeast is more at risk than other areas. As we head into the spring homebuying season, the next few months will reveal how severe the impact will be.”
The most vulnerable counties in New Jersey include five in the New York City suburban area: Bergen, Essex, Passaic, Middlesex, and Union. Interestingly, Hudson County — which has more confirmed COVID infections than any of them, according to Worldometers — is not on the list. It’s home to posh Hoboken and continuously gentrifying Jersey City, but that can’t be the whole story. Of the bunch, only Passaic has lower per-capita income than Union, and Bergen is one of the wealthiest suburbs in the country. Two of the more down-at-heel New Jersey communities outside the New York metro that made the list are Ocean County, along the Jersey Shore, and Camden County, across the Delaware River from Philadelphia. To its west, Pennsylvania’s Delaware County shares this dubious distinction.
While there are New York counties among the top 50 most at risk of the COVID virus, they’re not in the Five Boroughs. The closest of the four is Rockland County, which is next door to — that is to say a toll bridge away from — Westchester County, the site of New York State’s first hot zone, New Rochelle. Two others, Orange County and Ulster County aren’t too far away, in the Mid-Hudson Valley region. Finally, Rensselaer County is in the Capitol region, near Albany.
Meantime Florida’s COVID cluster is exactly where you’d think — Miami-Dade, Broward, and Palm Beach counties — and yet the economic impact doesn’t seem to be centered along the Gold Coast at all. While Broward does make the list, the risk is concentrated in the northern and central sections of the state, according to ATTOM, particularly Flagler, Lake, Clay, Hernando, and Osceola counties. If you don’t know where they are, you can be forgiven. Hernando is in the Tampa suburbs, and the rest are in the middle of nowhere. Think of Orlando, Jacksonville, and Daytona Beach as an outfield; those counties comprise the swath of shallow left-center where bloop singles land.
Other southern counties that are in ATTOM’s top 50 list are spread across Delaware, North Carolina, South Carolina, Louisiana, and Virginia. The populous suburb of Prince George’s County, Md., is also a risky bet according to the study. Only two ranked counties are in the West: Shasta County, Calif., near Redding, and Navajo County, Ariz., near Phoenix. The five in the Midwest are all in Illinois: McHenry, Kane, Will, and Lake counties, all in the Chicago metro area; and Tazewell County, near Peoria.
And Now Some Good News
But what about those counties at the other end of the spectrum? Is anyone truly immune to the effects of COVID? Apparently yes, sort-of, in an economic armageddon kind of way.
Texas has 10 of the 50 least vulnerable counties in the report. The insulated Texas counties include Dallas, Collin, and Tarrant in metro Dallas-Fort Worth and Ector and Midland in the Midland-Odessa area. Houston’s Harris County is also on the right side of these rankings. And, while that’s welcome news from the point of view of surviving the pandemic financially, they have a cratering oil market to contend with, so maybe they’re not such a safe bet either.
Wisconsin had seven counties on the least-risky list and Colorado with five. Other communities of note include tech industry magnets King County — Seattle — and Santa Clara County, one of the components of Silicon Valley. Again, though, we see some bad news in that good news, as the nearby businesses are exactly those that are never going 100% back to pre-pandemic workplace operations. Many if not most of the employees who were designated to work at home aren’t going back to the office, no matter how many beanbag chairs and foosball tables and Mountain Dew Code Red are on site.
But to leave you with some undiluted good news, a separate ATTOM report shows that much of the foreclosure risk identified in that study remains hypothetical. In reality, there were 156,253 U.S. properties with a foreclosure filing during the first quarter of 2020, and, while that’s up 42 percent from the previous quarter, it’s down 3 percent from the comparable, year-earlier period.
As states begin to open their economies in an effort to recover from the COVID-19 pandemic, new opportunities will arise in real estate as others start to close. From the looks of it right now, commercial real estate is going to have a slow recovery. That will likely include multifamily, though retail and office space is likely to have a slower recovery. But there is one area of real estate that could see a new surge coming out of the crisis: Fix and Flip property investing.
There are two primary reasons, and heads and tails of the same coin if you will, that will likely drive this surge.
- First, as landlords will likely raise rents to make up for lost revenues in the last three months
- New construction will slow down as new home sales fall
6 Economic Indicators Coming Out of the COVID-19 Crisis
There are several economic drivers impacting real estate during the COVID-19 pandemic crisis, and these drivers are likely to continue impacting real estate for the next few months. The most obvious of these drivers is the high unemployment rate, but it’s not the only driver. Let’s look at five of the biggest economic indicators for the COVID-19 recovery.
- There have been 36.5 million unemployment claims since the coronavirus crisis kicked off in March. Most of those happened in April when there was a sharp uptick in claims due to states shutting down non-essential businesses. Even as states begin to open up their economies, even though unemployment claims are tapering off, many workers are opting to stay on unemployment because they can make more than they can on their jobs. That means fewer new home sales as unemployed persons are not likely to qualify for home loans.
- New residential sales in March 2020 fell 15.4 percent from the revised February 2020 estimate of 741,000. With unemployment reaching a staggering rate, I would expect sales in April to have hit the floor. We won’t know for sure until next week, but a decline in new residential sales would mean that rentals and existing residential homes likely were in demand in places where such transactions could take place. With unemployment as high as it is, it’s likely that fewer people are moving. Those who do move are likely moving in with family or downsizing to rental properties.
- New residential construction fell 22.3 percent below the revised February 2020 estimate of 1.5 million. This will impact new residential sales going forward. Coming out of the COVID-19 crisis, fewer people will be in the market for a new home. They will either have to purchase older homes of lesser value, rehabilitated homes, or rent.
- Total U.S. business sales were down 5.2 percent in March 2020 compared to February 2020. Considering the shutdown of nonessential businesses did not take place for most states until late March and early April, it’s a sure bet that April’s figures are even bleaker. Add to that the total U.S. business inventories for March 2020 were down 0.2 percent, the indication is that the manufacturing and trade sector isn’t looking so good. When manufacture and trade falls, it impacts real estate sales.
- Retail and foodservice sales in the U.S. for April 2020 decreased 16.4 percent from March 2020. Since restaurants and foodservice businesses are some of the largest real estate investors, this will have a major impact on commercial real estate for the new few months or years.
- March 2020 sales of merchant wholesalers were down 5.2 percent from February 2020. Again, this will have a major impact on commercial real estate going forward.
These figures are taken from the U.S. Census Bureau.
Current sales impact future investment. If businesses, retailers, and commercial construction enterprises are losing sales today, or have seen a significant drop in sales and inventory recently, they will be reluctant to invest large amounts of capital in real estate projects until they can see an increase in these numbers. That increase will not come until several months after full recovery from COVID-19.
While commercial real estate and residential real estate sales may be suffering, people are still going to need a place to live. For that reason, I suspect renting and fix and flip investing to pick up in the near future.
Why Fix and Flip Investing Will Carry Real Estate for the Rest of 2020
When it comes to shelter, people have three options. They can rent, they can buy new, or they can buy an existing home. With new construction and new home sales in decline as a result of high unemployment and mandatory nonessential business shutdowns, that leaves the inventory for single-family homes to remain in the existing home market.
Landlords haven’t fared too well in the current market either. In some states, like Pennsylvania, landlords are prevented from evicting tenants if they are unable to pay the rent. That means when the COVID-19 crisis is over, it is likely they will raise the rent. This could drive some tenants to the single-family ownership market where renovated homes can attract their attention.
Another consideration is the mortgage market.
According to Bankrate, the 30-year fixed-mortgage rate fell 3 basis points at the beginning of the month. That puts it at 3.52 percent. The 15-year fixed-mortgage rate is down 15 basis points to 3.03 percent.
With unemployment high, fewer people will be in the mortgage market. Those who are will be looking for smaller and more affordable homes, not new construction in the best neighborhoods. Also, new construction and new home sales being in decline mean less inventory, which will drive more home buyers to the rehab market. And it’s likely that mortgage rates will fall some more before they go up again. These are prime conditions for a new surge in fix and flip properties where private investors can take an older home in need of repairs, give it the attention it needs then put it back on the market in time for newly re-employed workers to recover from the financial setback caused by COVID-19.
This is the short-term outlook. Assuming a vaccine is discovered by mid-2021, we should start to be a recovery in the commercial real estate market, including retail and multifamily, and see a rise in new home construction by the end of next year.
To fund this surge in fix and flips, I see marketplace lending continuing to be an option for most investors as the economy recovers. Do your due diligence and go with those platforms with a proven track record.
In any investing environment, there are winners and losers. During crisis environments, the winners are often big winners while the losers are often big losers. Who is poised to come out ahead during the COVID-19 crisis, and who is poised to fall behind?
Where The Money in Distressed Debt Is Flowing Today
In recent years, several prominent real estate funds have emerged that allow investors to pool their money into mutual fund-like securities offered by public real estate companies. Unlike REITs, they typically do not pay ongoing dividends. Instead, investors seek to gain returns through the appreciating value of the underlying assets. COVID-19 is proving to be a unique opportunity for some distressed real estate fund investors, but it could prove to be a pitfall for others.
According to Business Insider, more than $10 billion is about to pour into the real estate sector through distressed debt instruments.
One of the properties responsible for this new opportunity is the Williamsburg Hotel in Brooklyn. Benefit Street Partners is seeking to sell $80 million of distressed debt tied to the hotel. This is not surprising since COVID-19 essentially killed the hospitality industry overnight. That means debt tied to hotels across the country could hit the market in the next few months simply because hoteliers and other industry service providers are seeing a major drop in business due to fewer people traveling. Even with local economies beginning to open up across the nation, the hotel industry is going to struggle to return to its 2019 glory, and it could be a couple of years before it fully recovers. That spells opportunity for investors with cash to buy up the billions of dollars in debt that hotels, as well as food and beverage, restaurant, and tourism companies, have floating around.
Kayne Anderson in Florida raised $1.3 billion in two weeks and ended up turning investors away.
There were 939 commercial real estate funds globally in early April. At that time, they were seeking to acquire almost $300 billion in debt. One estimate in early May concerning the rate of delinquent commercial mortgages was 11 percent. As the economy continues to struggle, this number could go up by the end of the year even if every state opens up its economy completely by the end of this month (which is unlikely). The commercial real estate sector will continue to struggle and we’ll see more distressed debt hit the market as lenders seek to reduce their dry powder inventory.
In essence, firms in industries where the debt-to-equity ratio is high and where COVID-19 has impacted market forces negatively are likely either looking for buyers now for their distressed debt or soon will be.
Who Is Buying Up Distressed Real Estate Debt?
Cash is king. Investors sitting on piles of it have the best opportunity to purchase distressed real estate fund debt in the short term. They not only have the cash to make purchases, but they also have the opportunity to get to that cash quickly and to close deals as struggling lenders seek to recapture liquidity.
Lenders in industries impacted negatively by COVID-19 face a high number of probable defaults. If they can’t sell loans at a discount and regain their financial strength, these lenders will likely fold. Many of these lenders are small or alternative lenders that rose up on the heels of the last financial crisis but which have not navigated through a difficult economy until now. COVID-19 is their stress test.
One industry that is seeing huge fallout from COVID-19 is the retail sector, which was struggling before the current crisis as technology firms like Amazon and Overstock ate into their market share. Neiman Marcus and J Crew are among several retailers that have already filed bankruptcy in 2020. JC Penney is preparing to file and could do so by next week. As brick-and-mortar retailers close store locations, commercial landlords and commercial new construction will suffer (one notable exception is multifamily). If store locations are tied to capital investment, much of that debt will likely find a new home by the end of the year.
It’s likely that large traditional investment firms like Blackstone and Starwood Capital Group are going to swipe up a lot of the debt (and not just in retail). According to Morningstar, they are sitting on billions of dollars in cash and cash equivalents.
Greystone & Co. set up a $400 million fund to buy distressed real estate debt, but, according to company CEO Stephen Rosenberg, the company is wary about buying up debt too soon due to prices going lower rapidly and little market liquidity. In March, Florida-based Directed Capital purchased $10 million in loans for $7.4 million. Some of the investors targeting distressed real estate debt began to look for the opportunities in December, attempting to get ahead of the game.
Preqin reported that private equity firms have been building up distressed debt funds and was holding $77 billion in dry powder in 2019.
There is no doubt that 2020 will be a year of huge capital shifts toward major investment firms, private equity companies, hedge fund managers, and financial institutions that have the cash to buy up distressed debt as smaller players crumble, fumble, and fall to the ground. This will likely trickle down to smaller firms, which will scoop up the deals the larger players take a pass on. Investors looking for a rich opportunity may begin shifting their portfolios to increase liquidity so they can grab the tail end of this opportunity at the end of the cycle.
Where Real Estate Debt is Struggling In 2020
Marriott International carries $12.2 billion in debt and saw a 92 percent decline in Q1 2020 earnings compared to Q1 2019. Struggling to manage liquidity, the hotel chain will continue to struggle as long as shut down orders and social distancing remain in place. The hospitality industry will likely be impacted by COVID-19 for a couple of years.
Related industries such as the airline and cruise industries, as well as entertainment, have been similarly impacted by COVID-19.
The events management industry has also been affected as people are not gathering in large crowds anymore. That includes business conferences, rock concerts, and venues people rent for family reunions, graduations, and weddings. The food beverage, restaurant, and retail sectors are also struggling. These industries tend to be heavily invested in real estate. Companies in these industries with low liquidity and high debt will have to fight to maintain financial health. Their lenders will likely sell at least a portion of the debt in order to manage their own financial health, and that translates into opportunity for debt investors.
Auto sales are down 47 percent in the last month.
What each of these industries has in common is a high dependency on real estate. By the same token, these seven industries with high unemployment due to COVID-19 all rely heavily on commercial real estate development. As companies in these industries restructure their debt load, some of that will likely end up in the hands of investors ready to seize upon the opportunity. You could be one of them.
This time last year, a survey of chief financial officers (CFOs) by the Duke University Fuqua School of Business showed that 67 percent of CFOs believed the U.S. would see a recession by the second half of 2020. That was long before anyone thought about COVID-19 or a coronavirus pandemic. Eighty-four percent of them believed the recession would start by the first quarter of 2021. One month ago, CNN declared the coronavirus recession has begun. When the financial crisis of 2008 hit, I lost half my business because it was tied to real estate. That recession was caused by widespread deregulation and a housing bubble burst. Today’s recession has nothing to do with real estate investing.
That doesn’t mean there won’t be implications for the real estate sector.
What Has Coronavirus Done to The Economy?
More than 17 million Americans filed for unemployment in March. That represents a 13 percent unemployment rate. Several states have ordered “nonessential” business closures, and some industries have completely shutdown.
While the federal government has taken measures to mitigate the impact of these discomforts, many Americans will feel the repercussions for months. The $2 trillion stimulus package passed in late March will help some Americans struggling to pay rent and put food on the table, but it might not be enough for some who could see their jobs completely disappear if their employers can’t recover. The Paycheck Protection Program was designed to encourage employers to continue paying their employees despite business shutdowns, but, again, if economic conditions worsen or continue for a long stretch, it may not be enough.
In real estate, sellers are taking their homes off the market as prices decline. Not only are sellers reluctant to sell, but buyers are also reluctant to buy. On the other hand, there has been a surge of 3-D video home tours online even as new home listings dropped by 27%.
Commercial real estate is seeing its own problems. Retail stores that have been closed or affected by social distancing are struggling to pay their rent. Multi-family residential is experiencing the same tug of war between tenants and landlords, and new construction has been hit as some contractors are out of work.
Nevertheless, we could be turning a corner. President Donald Trump has signaled he’s ready to open the economy on May 1 while several state governors are following suit. Pennsylvania Governor Tom Wolf, who has had the strictest shutdown policy in the country, has targeted May 8 as the day of gradual re-opening.
The question on the table is, what will do this for real estate investing in 2020.
Will 2020 Be a Good Year for Real Estate Investing?
I’m optimistic, and I’m not the only one. One real estate investor is suggesting “Subject To” is the way to go in the current market.
Rather than suggest a single strategy that is best for the current market, I’d like to point out that there is always some kind of deal that is worth considering in any type of investing market. There are always boom and bust cycles, and that includes recessionary environments. Savvy investors learn to make money in all of them.
Real estate cycles typically swing from favoring buyers to favoring sellers, then back again. You also see swings from residential to commercial, and from rental properties to home buying. What’s interesting about the current real estate environment is that it was strong up until the coronavirus pandemic shut the economy down. Since then, it has reached a moment of stasis. We are not dealing with normal market forces.
On the surface, it might seem that the real estate markets are hurting, but I don’t see it that way. I see a strong market waiting for the tide to go out.
3 Potential Scenarios for Real Estate Investing in H2 2020
Looking ahead, I see three possible scenarios for real estate investing in the second half of 2020, but it all really depends on what happens in May.
- Full Recovery – The first scenario is a full recovery. If the country’s economy reopens in May with little turbulence, the real estate economy could bounce back to its pre-pandemic state. In other words, people will start buying and selling homes again, construction will start up again, and we’ll see a full recovery. If this happens, online real estate investing could see a surge as people staying at home during the crisis discover online investing platforms, and pick up their online investing activity when they go back to work.
- Partial Recovery – If the country’s economy reopens and a spike in COVID-19 cases occurs as a result, we could see a new ripple of business closures. However, I think it’s likely that state and federal governments, as well as real estate industry professionals, will be better prepared and install control measures that protect people’s health while continuing to do business. This is already beginning to happen as some states are opening up their economies while requiring face masks to be worn in public. Under this scenario, online real estate investing platforms like Sharestates will benefit as more investors respond by taking their investments online.
- Slow Recovery – Under the slow recovery scenario, COVID-19 cases could spike due to a reopening of the economy and recessionary economic conditions have a bigger impact on the economy as CFOs predicted last year. In this case, online real estate investing may not be as popular as it would be in the above scenario, but will still see a boom.
Much of the progress for the rest of the year will be determined by how the coronavirus responds to summer weather conditions, currently an unknown, and how quickly testing can be done and a vaccine created.
Real estate is intrinsically local. That means the recovery from the current economic climate will likely be local, as well. New York and other major metro areas impacted significantly by a high number of cases of COVID-19 could see a slower recovery than other parts of the country where there has been a negligible impact. Since many real estate crowdfunding platforms offer deals based on physical property projects such as new construction and flipping, this new reality could impact online real estate investing. But it shouldn’t be across the board. Again, in local geographic areas where the impact has been insignificant, there will likely be little blowback. I, for one, am not planning to make any changes to my online real estate investing strategy in the short-term.
Before COVID-19 made its impact on private lending, there was a new trend developing in correspondent lending. In essence, lenders sitting on too much capital and not enough deal flow were lending to other lenders. It was the fastest-growing space in private lending.
All of a sudden, mortgage refinancing surged while demand for personal lending dropped. Small business lending is soaring. Is there a new normal in lending, or will we go back to the old normal once the current crisis is over?
Business Cycles, Black Swans, and Private Lending
Businesses cycles come and go. There are boom and bust cycles in every sector. We’ve seen various cycles in mortgage lending, real estate, banking, retail, e-commerce, financial services, and more. The savvy investor learns to anticipate the business cycles and develops an investment strategy for each type of cycle. Some investors don’t change their strategies from cycle to cycle but may focus instead on priorities, the value of their investments, or their asset class mix. Private lenders would do well to pay attention to the cycles, as well. That said, there are times when an unexpected black swan event throws a wrench in the business cycle. COVID-19 is such an event.
Heading into 2020, almost every economy around the world was expanding. Many of those economies, the U.S. included, were maturing in that expansion. Since the coronavirus outbreak, however, there have been disruptions on several levels.
For instance, here are a few ways COVID-19 has disrupted the global economy:
- U.S. import and export activity has declined significantly
- Labor market concerns have risen
- Federal Reserve interest rates have been cut sharply
- U.S. Treasury yields have hit historic lows
- Volatility is the order of the day
The list of black swan events that have suddenly made big economic impacts is diverse. War, famine, terrorist attacks, nuclear reactor meltdowns, stock market crashes, and technological failures, just to name a few. The curious nature of black swan events is that they are unpredictable. These are events that no one could foresee but that pack huge financial implications across one or more economies.
What’s interesting about black swan events is that they often create opportunities as they are shutting the door on others. Famed Wall Street trader Jesse Lauriston Livermore turned short positions into $100 million during the stock market crash of 1929, while others were losing their fortunes. While COVID-19 has led to massive unemployment and short-term small business closures, many private lenders are seeing a surge in loan applications. In short, business cycles can be relied upon to an extent, but unexpected events can cause disruptions to those cycles that can benefit those keeping their eyes open for new opportunities.
How to Protect Your Investments in An Age of Volatility
Emotional selling is often the worst thing an investor can do in times of uncertainty. That doesn’t mean investors should hold onto all positions indefinitely. But if you have your investment strategy thought out before a crisis hits, you’ll fare better during the storm.
What can private investors do right now to ensure assets are protected during this turbulent time? Here are a few ideas:
- First, don’t panic.
- Look for where the market is moving right now. Private lending has picked up in some areas. Due to a rise in unemployment and the inability of many renters to pay their rent and homeowners to make their mortgage payments, federal and state governments are issuing relief packages for small businesses. Those businesses that survive through the pandemic crisis may be in the market for a private loan on the other side.
- Try to identify short-term opportunities whenever possible. Until investment markets return to normal and regain some stability, volatility will be the norm. That doesn’t mean “sitting out” is the best strategy.
- Look at previous crises and see if you can find any patterns. Commercial real estate has often done well when residential struggled, and vice-versa.
- Continue to diversify your portfolio. Now might be a good time to look at your asset class mix. Is it heavily weighted toward an asset class that is struggling amid the current crisis, or heavily weighted toward high-risk investments? You might shift some of your assets to an asset class that will serve as a hedge against potential losses in those sectors. But keep in mind that short-term volatility may not affect the long-term position of individual assets within that asset class.
- Realize that, more often than not, real estate typically fares better long-term even if it struggles during short-term crisis moments.
- Don’t be afraid to adopt a wait-and-see attitude. Every investment portfolio is different. You only lose if you sell at the wrong time. Just because an asset’s value has been affected by the current crisis, that doesn’t mean that an asset’s value will remain at its current position after the crisis has passed. There is some talk of re-opening the economy in a couple of weeks. Whether that happens or not, and, if it does, how it happens could mean another shift in market forces that could send a ripple through the economy that counteracts recent market moves.
None of this should be construed as investment advice. You should talk to your financial advisor before making decisions regarding your portfolio, but panic selling is almost always a sure losing strategy, so don’t be overrun with emotion.
How Private Lending is Poised to Change in 2020
It is likely that private lending practices, including underwriting, will change in the short term. No one can be certain how COVID-19 will impact private lending long term. A lot depends on whether or not the economy can get back to normal soon, and how quickly it gets back to normal. That, of course, depends on how soon health and infectious disease professionals can develop a vaccine for the coronavirus and how soon cases of COVID-19 decline over the next few weeks. These are unknowns.
Sharestates is continuing to monitor the private lending industry and the economy overall. Meanwhile, investors should consider that loan underwriting practices are likely to change for the foreseeable future. Lenders are already tightening credit standards. In cases where lenders have been sitting on a lot of capital, those lenders run the risk of too rapidly approving loans and placing that capital at risk. That will require additional control measures to ensure that lending too often and too quickly does not place lenders and investors at risk. That may include a cap on loan originations, loan amounts, and some restrictions on the types of borrowers allowed for such loans.
While uncertainty increases investment risk for lenders and investors, sitting out could be a greater risk. Investors may have to look harder for good deals in this environment, but they do exist.
Housing-related stocks such as Zillow and Redfin fell by more than 10 percent on Wednesday, April 1. It appears these stocks may be responding to mortgage applications falling 24 percent, well beyond expectations, from a year ago due to increased concerns over the spread of the coronavirus. Many economists are predicting that COVID-19 will lead us into a recession. We’re already seeing some fallout in the lending capital markets.
3 Ways COVID-19 Is Impacting the Home Buying Process
In the week ending March 28, 6.6 million Americans filed for unemployment. Half that many filed the week before. Globally, more than 1 million cases of coronavirus have been charted with nearly a quarter of those in the U.S. Several states have issued shelter-in-place orders or lockdowns while others have ordered mandatory quarantines for incoming visitors, and some have issued curfew orders. These restrictions are causing havoc in the real estate market in very real ways.
Here are three ways COVID-19 has impacted the home buying process and will likely continue to impact the home buying process:
- Some states have shut down nonessential businesses, or businesses that are not “life sustaining.” As a result, real estate services such as appraisals and inspections can’t be scheduled in those states. Since homes can’t sell unless those services are performed, the effect is a slowdown in home sales.
- Social distancing is affecting all areas of real estate. Agents are reluctant to schedule open houses while mortgage brokers and title companies are moving services online, facilitating digital transactions rather than in-person meetings.
- One couple in Connecticut found themselves juggling dates and working through a difficult moving process as a result of government-mandated policies.
Other real estate sectors being impacted by the coronavirus crisis include property management, commercial real estate, and new development funding.
3 Real Estate Sectors Hit Hard by COVID-19
COVID-19 is pulling at the fabric of real estate in multiple ways. Here’s how it is impacting three real estate sectors that have enjoyed a long run of prosperity since the 2008 financial crisis.
In the property management sector, millions of unemployed tenants are unable to pay rent. While many have filed for unemployment insurance, it takes a few weeks to receive the first check. Treasury Secretary Steven Mnuchin said in a press conference on April 2 that the first stimulus checks will arrive in people’s bank accounts within two weeks. Still, many people have a rent payment due this week. Some tenants are asking for rent forgiveness during the crisis while some states, including New York, have placed a moratorium on evictions.
Property management firms are caught in the middle, balancing the concerns of both tenants and landlords. Of course, if they’re not collecting rents, they aren’t collecting management fees.
Commercial Real Estate
Retail shop closures are also having an impact in several ways.
- Malls, shopping centers, and other tenant-based complexes may not collect rents from their commercial customers during this time
- Force majeure clauses are allowing commercial developers to break commitments to completeprojects by a certain deadline
- New project developments are seeing delays as many construction crews are out of work due to stay-at-home orders and nonessential business closures
New construction is being impacted in residential, commercial, and industrial sectors. That means there are many developers and project managers out of work, along with their entire employment force including contractors and subcontractors. Of course, that’s having a domino effect on mortgages, rental agreements,
and maintenance sectors.
Even in states where stay-at-home orders and business closures have not been implemented, there has been a slowdown in development.
This, of course, is impacting how and where capital is being deployed in real estate.
How COVID-19 is Impacting the Real Estate Capital Markets
While the real estate market has been impacted at the ground level, the impact may be felt the hardest in the capital markets. Deal flow in private equity and real estate has fallen at an unprecedented global level. The Motley Fool recently reported the 10-year treasury hit an all-time low of 45 basis points after rising to an all-time high of 1.226%. This short-term volatility creates uncertainty, and investors don’t like uncertainty. The fallout is being experienced in the secondary market.
Mortgage bankers often sell loan originations to be packaged into mortgage-backed securities on the secondary market, then hold onto the loans. Recently, brokers have been issuing margin calls. As a result, lenders are seeing their liquid assets evaporate.
This creates a new problem for private lenders. Without working capital, they can’t issue new loans. That, in turn, could create a ripple effect throughout the real estate markets. Developers who can’t get loans can’t build. Rehabbers who can’t fund their projects will buy fewer properties, and they’ll sell fewer properties. Less capital in real estate means fewer real estate deals in all sectors–residential, commercial, and industrial.
Private real estate lenders facing a liquidity challenge amid current and sudden volatility need a capital infusion to continue operating and service the increased demand in loans caused by the rapid unemployment and business closures. That’s why Sharestates has issued a margin call relief program.
The Importance of Capital Liquidity in Real Estate Private Lending
Lenders without capital are like boats without water. The change in environment doesn’t change their nature, but it does affect their ability to function as intended.
While the CARES Act can assist families struggling with paying their mortgages, as well as businesses struggling due to closures, it does little to address the needs of private lenders who have seen their liquid assets drain as a result of margin calls.
The Federal Reserve, in mid-March, lowered its benchmark interest rate to 0%, but that’s done more to hurt the capital markets than help. If private lenders run for too long without liquid capital, it will seriously curtail their ability to issue new loans and maintain operations. The largest operational expense for most businesses, including private lenders, is payroll. Without working capital, private lenders will have to lay off some of their staff. Not only will that hamper their ability to service existing loans, but it will also add to the already skyrocketing unemployment rate. For small lenders, any reduction in employment staff could be drastic.
Additionally, lack of liquid operating assets could cause some lenders to miss mortgage or rent payments on their office space, which would seriously diminish their ability to continue operating.
The most likely scenario would be unnecessary consolidation in the lending market. As smaller lenders struggle to survive through the temporary turbulence, they may find their only option is to merge with a larger lender, sell their loans at a discount, or sell part or all of the business to larger lenders or investor pools for less than the company is actually worth. The best option for most of these lenders is to sell some of their existing loans at a discount so they can continue to underwrite new loans and navigate through the coronavirus crisis intact.
Liquidity is the backbone of private lending. Capital is to loan originations as water is to boats. For more information on Sharestates’ margin call relief program, click the button below.