Charting Your Real Estate Investments Through Troubled Waters
Several factors are at play in the real estate market, but cash is still king.
There’s been a lot of conversation about how COVID-19 will affect the U.S. residential real estate market. As real estate investors, we want to have current information with accurate updates so we can make informed decisions.
Let’s take a quick look backward before we look ahead.
Range of Impact
Never in my lifetime have I seen a government shut down its economy due to a pandemic. When the Spanish flu invaded our country in 1918, more than 675,000 people died. Even though the first flu vaccine wasn’t developed until 1942, our economy withstood this brutal attack.
As with the Spanish flu, the impact of COVID-19 on communities and regions has not been uniform across the country. As Thomas Garret points out in his white paper on the economic effects of the 1918 influenza pandemic, Pennsylvania, Maryland and Colorado had the highest mortality rates although those states had very little in common.
From this example, can we discern that different areas of our country will experience different impacts and therefore outcomes?
Cash Is Still King
The past decade has been stellar in both the residential and the commercial real estate markets. The stock market had experienced unprecedented growth and new highs. One would think companies should have cash in their bank accounts. What a wonder to see how many large and small businesses applied for the Payment Protection Program along with the overwhelming loan applications for the SBA’s disaster relief loan. Remember, you can run a business with a loss, but you cannot run a business without cash flow.
In vacation areas, there are investors who own multiple vacation rentals who will not be able to make more than one or two of their mortgage payments. There are many small investors across our country who have invested in multifamily. Some will not capture enough rents to meet their lender obligations. So, there will be upcoming deals for investors who are able to evaluate swiftly and fund quickly. These opportunities will be available for anyone who has access to cash, regardless if they’re large investors or small investor groups that pool their capital.
Limited Access to Properties
There are some obvious challenges currently facing buyers and sellers. For example, appraisers are not allowed out of their homes in some parts of the country due to shelter-in-place orders. And some folks simply don’t want those appraisers trampling through their home. Open houses are reduced to non-existent in many areas due to social distancing and sellers not wanting strangers in their homes, even if they are potential buyers. These conditions will stall loans and, hence, closings for those transactions.
Flippers, however, do not care whether appraisers or buyers trample through their flip at 10 a.m. or 10 p.m. So, those transactions will get to the closing table as long as lenders don’t tighten requirements. Chase just announced new lending requirements for conventional loans is 20% down and a minimum 700 FICO score. The president said he was relaxing underwriter requirements for government loans for specific items (i.e., recent pay stubs, seasoned funds, etc.) to keep this industry fluid. If that happens (I have my doubts), then these loans will close. If these requirements are not lifted, we will see a dip in sales as well as a longer timeline for a lender to close.
First-time homebuyers who have young children or older parents don’t want to chance spreading this contagious virus to these family members. In addition, many first-time homebuyers have had their lives disrupted working from home, taking salary cuts or, even worse, being furloughed.
The National Association of Realtors reports existing-home sales fell 8.5% in March following a February that saw significant nationwide gains. Each of the four major regions reported a dip in sales, with the West suffering the largest decrease.
Access to Cash
The Fed rate is zero and probably won’t go much lower. So, the cost of money is still cheap. Access to that money, however, is a different story.
The Department of Treasury is responsible for distributing those individual $1,200 checks the government is giving away. They are also responsible for sending out millions of monthly Social Security checks. Secretary Mnuchin acknowledged the delays in those checks getting out due to the IRS’ antiquated software and being short-staffed. Combine those tasks with working through the banks trying to distribute loans to small businesses. So, the flow of money is going to be stalled, leading to two quarters of negative growth. Economists call two consecutive quarters of negative growth a recession.
An article in Financial Times informed us that France’s government is not putting together a bailout program. Rather, the French government just paid every business’s payroll, thereby continuing the flow of money. In this scenario, rents will be paid and jobs will be maintained until the pandemic is behind us. Rather than creating government bailout programs, this strategy tries to give some semblance of normalcy to people’s cash flow. Taxpayers would continue to receive paychecks that are deposited into their bank accounts, even though they’re not working. This creates at least four positive outcomes:
1) Alleviates the pressure on unemployment benefits
2) Jobs are held in place
3) The job is waiting for employees upon their return
4) Government isn’t burdened with excessive debt If I learned anything from 2008, it’s that real estate investors large and small will lead us out of the upcoming real estate rut. Many investors are in a cash position. Others will continue to have access to short-term loans along with established credit lines at big-box stores. I do not believe real estate prices will tank as they did in 2008 since the purchase of most personal residences in our country have not been overleveraged. But there will be a slight decrease in price by those motivated to sell. The pandemic has temporarily shut down our economy, and there will be an opportunity for all types of investors to fuel the rebound in a very short period of time.
