Are We Headed for a Corona Recession?
What that means for real estate investors?
There might have been some question about whether the coronavirus would lead the U.S. into a recession. The hoarding of toilet paper makes me think it’s certain. Not because we’ll run out of toilet paper—the U.S. and Canada produce volumes of it—but because hoarding means consumers are really worried and are changing their spending behavior. That won’t just flip back in a few months.
It’s consumer behavior—what consumers think and do—that grows or shrinks the economy, not bank failures or layoffs at airlines. Consumers are 70% of the economy, and they’ve already been on edge the last few years.
Consumer debt, even after you consider inflation, is at the highest levels we’ve ever seen—$12,000 per man, woman and child. And the growth of jobs in 2019 was at the lowest rate since the last recession. So, it’s not surprising that the rate at which consumers have been spending was already slipping. I didn’t expect a severe slowdown this soon, but when the economy is fragile to start with, anything can happen.
That’s why the coronavirus isn’t the cause of the recession that now seems inevitable; it’s the catalyst, suddenly accelerating a slowdown that was already in the works.
Consequences for Real Estate
Recessions produce government reactions and public responses that strongly affect real estate. This time we won’t see massive foreclosures and a wholesale drop in home prices as happened after 2008. In fact, it’s much more likely that the effects this time will actually be good for real estate investors.
The government will push interest rates even lower. This means, for example, that financing an investment in rental property not only will be cheap, but the returns on alternate investments like bonds and CDs will remain poor. Investment funds and other sources of money will welcome real estate projects. Banks in particular are now so heavily dependent on consumer loans that they have a large incentive to shift more money into real estate.
More consumers will need (and want) to rent. Homeownership for young adults has been declining for decades, to around 35%. With incomes stalled, home prices high and more people with student debt living in expensive big cities, that trend will continue. And after promoting mortgages and homeownership relentlessly for the past 50 years, the government may (that’s more of a guess) finally provide more policy support and tax breaks for renters.
Specific Markets
Some real estate markets were in a home price boom in the past few years. Think: San Francisco, Seattle, Denver, Miami, Las Vegas, Southern California and others (see Chart 1). Because the local economies were doing well, I thought the bubbles could end in a soft landing. Now I don’t think so. Eventually, these will be great places for investors in rental properties. After all, that’s why the bubbles happened—more demand than supply—but first we need to see where prices will settle. Some markets with large renter populations are better immediate bets, even though demand will flatten everywhere for a short while. They’re not high-growth markets, but they aren’t overpriced and the ratio of home prices to annual rents is favorable. Think: Chicago, Memphis, Detroit, Atlanta and others (see Chart 2).
