The Great Migration
What does the urban center exodus and work-from-home evolution mean for real estate investors?
The COVID-19 pandemic has disrupted many things about our lives, and these changes run much deeper than wearing masks and social distancing.
In the housing market, the pandemic has renewed a trend away from densely populated urban centers and toward more spacious dwellings in the suburbs. This trend is so significant that it is driving headlines in the industry and beyond.
Zillow released research in August showing that rent prices are increasing in suburban areas while stagnating in urban centers. Researchers hypothesized that “suburban rentals may now be more appealing for renters who no longer need to commute or are temporarily unable to enjoy some of the amenities of urban living.”
A Zillow survey from a few months earlier indicated that renters started considering moves based on the work-from-home freedom from commutes as well as requirements of a designated room to serve as an office. Those trends have certainly expanded through the third quarter of 2020.
When you add the fuel of working from home to kids doing virtual learning, it’s no wonder that The New York Times is touting an unprecedented “surge that is unlike any in recent memory” out of New York City and into the suburbs. But this isn’t just a New York trend—it’s happening in big cities nationwide.
Despite double-digit unemployment rates, the stock market has fully rebounded and continues to flirt with all-time highs. Both existing and new home sales have shown us what a true V-shaped recovery looks like. While we are still in the thralls of a pandemic, housing is one of the brightest segments of the economy, with incredibly low interest rates and buyer preferences demanding far more single-family properties than are currently on market.
As we’ve seen many times before, just because the rules of the game change, it doesn’t mean real estate investors stop playing. They adapt to the new game and compete. Here’s what we’re seeing right now with single-family rentals, new construction and fix-and-flip properties.
Single-Family Rentals
Inventory for single-family homes was tight before the pandemic, and the increase in demand from those fleeing to the suburbs—combined with record-low interest rates for homebuyers—means that demand far outstrips supply. According to the National Association of Realtors in August, housing inventory in the top 50 U.S. metros declined 38% year over year. This means investors will need to be more creative than ever in finding good investment properties.
Investors are pros at using creative marketing strategies to uncover potential buying opportunities before they reach the MLS. Currently, we’re hearing of investors going back to grassroots door-to-door canvassing to network and learn who might be interested in selling their homes. Investors must not only be creative to expand their targets but also consider rehab-to-rent properties or even build-to-rent projects instead of simply buying existing housing stock.
The good news for SFR investors is that if they can acquire a good property, the trend toward the suburbs and rental homes means that rent rates should remain solid for a long time. Despite eviction moratoriums being extended in many markets, investors are still buying properties where available. This is an area to watch though. As these eviction moratoriums expire and unemployment remains high, it’s important to conduct thorough application screenings to ensure tenants’ ability to make monthly rent.
Investors need to move quickly when they find the right property to add to their portfolios, which means knowing they have the cash or available debt exposure to make a deal as soon as they’re confident the numbers pencil out. Ask your lender if they have a pre-approval program or line of credit you can get qualified for to ensure you have ready access to capital when needed.
Fix-and-Flip Properties
The tight housing market means that the need for affordable housing is stronger than ever. Fix-and-flip projects can help revitalize distressed properties and turn them into sought-after homes for sale or rent. Investors who find these properties and rehab them appropriately for the area will see after-repair values in a tight market remain strong.
Investors who focus on fix-and-flip rehabs must understand trends that are driving buyer demand. As mentioned earlier, parents who are working from home or have kids learning virtually have a renewed interest in larger homes that include a dedicated home office and room for homeschooling. These features can differentiate one investor’s house over another and offer increased margin opportunity on larger projects. Whether these are separate dedicated spaces, finished attics or basements, or added ADUs and she-sheds, such rooms will drive up construction budgets. Still, they should provide a return on investment that is worth the initial outlay.
The fix-and-flip and fix-to-rent investment strategy boomed out of the 2008 financial crisis. Many veteran investors are poised to capitalize if a similar surge of foreclosures happens in the coming months. This means many investors who believe the end of mortgage deferments and prolonged unemployment could open buying opportunities in the months ahead are keeping powder dry to be ready. But with home prices continuing to climb, demand at all-time highs, and under 4% of mortgaged properties with negative equity, the prospects of a buying opportunity like we saw for investors in 2008 seems unlikely at the moment.
A September report from CoreLogic shows, however, a significant spike in delinquent mortgages. So, depending on the duration of the pandemic and prolonged unemployment for many millions, it’s certainly possible that distressed sale increases could follow.
New Construction
In a normal year, fall typically means a slowing trend of new home starts and sales, but 2020 bucks the normal trend. According to the National Association of Realtors, “the strong summer sales are an indication that the pandemic merely delayed rather than
obliterated the spring market. … There are no indications that contract activity will wane in the immediate future, particularly in the suburbs.”
Land, labor and lumber prices continue to soar and are certainly adding to the cost of a newly built house. According to a recent Forbes article, the price of lumber is up 134% year over year, adding an additional $14,000 to the cost of a new house on average.
Although prices continue to climb, they are not enough to offset demand and the surge of families moving to the suburbs and rural communities. New home starts in July were at their highest level since February and are showing no signs of falling off. Many of our builder clients experienced 2-3 months of not being able to get on job sites or get permits or inspections. They are playing catch up as well as trying to capitalize on current market conditions.
Maintain Flexibility, Move Quickly
We’re still in the midst of the most unusual times and there’s great uncertainty about what lies ahead. But investors who can find, rehab or build properties that meet the new demands of renters and buyers find the properties are being rented or purchased at record pace.
Inventory is extremely tight, and the competition for good investment properties is fierce. To compete, investors must be able to move quickly when they find a property. Investors who are agile in their approach, quick in their response and aware of the ever-evolving market trends are poised to be the most successful in this market. Whatever your preferred type of investment property, you can put these keys to work as you develop a successful approach to residential real estate investing.
