What Could Record-Breaking Unemployment Mean for Real Estate Investors? | Mynd Management
As of September 2020, the unemployment rate reported by the US Bureau of Labor Statistics (BLS) was 7.9%. That’s significantly lower than the coronavirus inspired current peak unemployment rate of 14.7% reached in April of 2020 when the rate skyrocketed from 3.5% after over a decade of gradually returning to pre-Great Recession levels.
Meanwhile, the S&P 500 plunged from 3,386.15 points to 2,237.4 points from February 19th, 2020 to March 23rd, 2020, before both rebounding over the next several months and setting a new record high of 3,508.01 on August 28th, 2020.
During this time, the coronavirus pandemic inflicted 9.38 million infections and 231k deaths upon America, although the actual rates of infections and deaths may never be known.
Given all this, one may wonder: how has the real estate market been doing this entire time?
That’s because all of these figures don’t necessarily correlate with the supply of and demand for real estate. For this reason, the significance of all this data has to be teased apart to appreciate its impact on the real estate market properly. It’s genuinely a four-part question until it isn’t.
How does record-breaking unemployment affect the real estate market?
The unemployment rate skyrocketed as soon as shelter-in-place measures were instituted. Due to an inability to make mortgage and rent payments, one might have expected an overabundance of distressed real estate because of coronavirus.
While many office spaces, hotels, and retail properties did, in fact, flounder, residential spaces, for now, have been able to mostly avoid foreclosure or being sold by their owners for several reasons:
- Government assistance
- Landlords budgeting for vacancies
- Landlords dipping into emergency funds
- Landlords taking on additional debts
- Landlords selling properties
- Landlords working with tenants to get as much rent paid as possible
- Tax deadlines being extended
- Tenants dipping into emergency funds
- Tenants being able to pay partial rent
- Tenants eventually finding new employment
- Tenants being able to temporarily return to work as shelter-in-place measures got rolled back
Right now, residential real estate is enjoying high prices in many markets because of:
- Low inventory
- Historically low mortgage rates
- High demand
What does that mean for real estate investors?
If you find a great deal, now’s not a bad time to go in. If you want to have more cash on hand, now’s a good time to sell. If you want to experiment with new strategies or take some chances, now’s a good time to wait.
If you’re going to have new tenants, consider making your criteria more strict:
- Higher credit score.
- Income minimums.
- Increased security deposit
- Check references
1. Personal 2. Professional 3. Previous landlords
How much uncertainty is there in the real estate market?
There’s currently a lot of uncertainty in the real estate market because of the coronavirus pandemic and its fall out. That doesn’t mean prices will suddenly plummet, but it does mean that potentially large change is on the horizon.
On October 31st, 2020, for example, the New York Times reported that nearly two dozen states had their worst weeks since the start of the pandemic. The entire United States had over 99,000 new coronavirus cases in a single day, setting a new national record. Given coronavirus’s previously observed historical trends, things are going to get worse before they get better. Except now, due to infections increasing nationwide as opposed to in epicenters, hospitals are more likely to be overwhelmed.
While the coronavirus pandemic casts a shadow of uncertainty over the real estate market, there are several things real estate investors can say with relative confidence:
- The coronavirus pandemic is getting worse.
- It’s uncertain when a vaccine for the coronavirus will be developed.
- It’s uncertain how long it would take for the coronavirus vaccine to be distributed in the US.
- There will likely be no new coronavirus relief package in the near future.
- There may be more lockdowns.
- States and localities will likely roll back some of their re-opening measures.
- State-based eviction moratoriums like California’s AB 3088 expire soon (February 1, 2021).
- The CDC’s nationwide eviction moratorium expires soon (December 31, 2020).
The factors that made it possible for many to weather the first seven months of the coronavirus pandemic may play a smaller role as the pandemic rolls on merely because:
- Tenants and landlords may have less savings.
- It’s unclear what sort of protections or relief tenants and landlords may get.
- It’s unclear how businesses already struggling because of the coronavirus can survive.
- Pandemic fatigue may diminish resilience.
- The winter will force more people to spend time indoors.
- Flu season will intersect with the pandemic.
- If opening measures are rolled back, that can mean the return of:
- Reduced working hours
- A reduction in the workforce
- Furloughed workers
- More businesses going under
How does record-breaking unemployment affect the stock market?
One of the advantages of real estate over the stock market is that real estate is less volatile. Real estate also has a low correlation with the stock market, making it an ideal place to park one’s money in the event of turmoil in the market. However, one might wonder how the stock market was able to recover from the pandemic so quickly and even set record highs.
The answer lies in the way technology has been reshaping society. As reported by Eric Levitz of NY Mag:
- E-commerce has been replacing a lot of retail.
- Automation is replacing a lot of warehouse employees.
- Tech companies disproportionately impact the S&P 500
This means that tech companies, which were already best prepared to survive the coronavirus pandemic, were also most likely to prosper during the pandemic. As smaller businesses shutter their doors, many tech companies stand to gain more from having less competition. And the sectors that suffered the most because of coronavirus, like airlines and leisure, constitute between 10 to 20% of the S&P 500.
All this information is a snapshot of the situation as it appears right now. The coronavirus pandemic is expected to be worse in the winter than in previous months and potentially harder to weather due to its toll on the public. If that happens, then many tenants might not be able to pay their rent, and many landlords won’t meet their mortgage payments.
Without state or federal aid, this could mean a lot more distressed properties that, in turn, can be purchased by investors. An increased supply of homes could lead to a decrease in price in many markets, which would improve cash-on-cash return (CCR) for investors. CCR can also be improved by investing in Class C or Class D properties.
Originally published at https://www.mynd.co.