Real Estate in the time of COVID.... Update.

“All models are wrong, and some are useful.”

George Box, 1976, Journal of the American Statistical Association

Regardless of your thoughts on COVID 19 and the government’s response, the economy’s impact has been devastating. However, the effect on the Real Estate Market is a bit more unknown. There are actions for you to do right now to ensure you are proactive and not reactive. I started this a blog back in March, but models, facts, assumptions, keep changing; thus, I would start over and over. AND Then I moved… Again. After reviewing what I have created and updating my thoughts based on new information, I wanted to get this published. Bottom line upfront, there are ample opportunities today, interest rates are low, new house inventories are low, and prices are increasing. Most markets are in the cycle where it is most profitable to either wholesale and/or flix&flip -- you should be actively investing at this time!!

Focus on your house first.

This time at home, it is the perfect opportunity to ensure your financial house is in order. Take the time to understand your expenses are and how liquid your cash reserves are if you have not yet review (or create) a budget and a personal cash flow statement for your family. Spend time reading and learning those skills you tell yourself that you would know once you had time. You have time now! If you are still able to collect an income and cannot eat out, travel, spend money (except for Amazon), take this opportunity to shore up your retirement accounts and save.

Do what others are not.

I would not want to generalize as I am working more hours today the I was before COVID. As working from home quickly turned into never stop working. I hear stories of binge Netflix watching, zoom wine calls, and sleeping in. I hear of people were sleeping in a good part of the day…

I spent time working late, watching the market, reading the news, and then decided to do what others were not. I turned off the TV, placed a time limit on my day job, and then re-focused. I read those books that I had stacked up next to my bed. I analyzed several markets and sent out direct mail marketing letters.

Current Market Observations.

With more people working from home and increasing fear in larger cities from COVID, civil unrest, and lack of employment opportunities, there is an increased demand for real estate in suburban markets. James Altucher wrote an essay saying that NYC is Deed forever; people are working remotely and with high-speed internet availability. People may never return to the office, classroom, or entertainment as the wide bandwidth internet allows all of that comfort and safety at home. According to StreetEasy analysis, housing in Manhattan dropped 4.2% in value since last year and stay on the market two months longer.

There has been a trend increasing vacancies and declining housing prices in some of the larger metro markets. This shift has been seen to cause an increase in existing prices in the suburbs and other outlying areas. The Zillow 2020 Urban-Suburban Market Report, dated 12 Aug 20, mentions housing in the suburbs shows an increase of sales even with limited supply suggest a hotter market then nearby urban areas.

If not investing yet, time is now to get started.

The CARESs ACT

To prevent Coronavirus’ economic consequences, the United States Congress passed a $2 trillion stimulus bill. Simultaneously, the Federal Reserve has offered an additional $1 trillion each day in March to keep the repo market functioning. Trump administration economist Larry Kudlow said the overall stimulus would likely come to $6 trillion! As shocking as those numbers are, the Federal Reserve also cut its benchmark interest rate to a whopping 0.0 percent as the Fed’s discount rate was cut to 0.25 percent.

What does this mean for Lending?

The discount rate is the rate at which federal banks can borrow directly from the Federal Reserve. They are most certainly not zero for you and me.

Even still, banks’ average interest rate on 30-year mortgages was near historic lows earlier this year. Despite the increased economic uncertainty, the Fed slashing its rates should keep mortgage rates low and could drive them lower.

However, even when rates are low, that doesn’t mean banks will necessarily be lending. Since March, I have not been able to secure a cash-out refinance or a mortgage on an investment property. Typically, the Federal Reserve dramatically reduces interest rates when the credit market is freezing up. During the 2008 financial crisis, the Federal Reserve also dropped rates to zero and engaged in aggressive quantitative easing—but that didn’t stop the recession.

During the last economic recession between 2005 and 2008, residential mortgage originations fell by almost 50 percent, and the unemployment rate peaked at 10.2 percent in October 2009. Previous estimates stated the unemployment rate could reach between 20 and 30 percent—numbers not seen since the Great Depression. But those estimates have been vastly inflated and the modals incorrect. According to the Bureau of Labor Statics, the US never reached those numbers and is currently on a downward trend.

Even before the coronavirus panic, banks had started to tighten lending standards. MarketWatch notes: “Banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses,” and, “Loan solicitations by email have dropped for both credit cards and personal loans, according to market-research firm Competiscan.”

That being said, the mortgage industry hasn’t ground to a halt.

The loans from banks may be harder to get, but the rates are better than ever. Whereas a year or two ago, rates were in the 5 to 5.75 percent range (rates tend to be higher on the coasts as compared to the Midwest), right now, they’re ranging from 3.14 to 3.94 percent.

The long-term economic effects are difficult to predict and depend on many factors. But it would appear that loans will be harder to get at least for the immediate future and provide better rates than before. As the cliché goes, it is a great deal if you can get it!

Should You Sell?

In many locations, the market has transformed into a sellers’ market. There is more demand than current inventory, and the market is responding with over 20% increase in new start construction. Zillow’s report commented there is an increasing number of houses sold above the asking price.

CNBC predicted that home sales could fall 35 percent from what they were last spring! That would make for approximately 2 million fewer home sales. Demand has tanked during this crisis. This is different from saying that home values will drop 35%, but since June, that trend has reversed and demand has returned as well as home prices to pre-COVID levels.

Economic indicators say that a “V-shaped recovery” is starting to form and the housing market is starting to bounce back. Even if it’s not a sharp recovery, when this pandemic slows down and the economy begins to open, there will be some pent-up demand. So, sales should continue to increase as we have seen for the past two months.

Should You Buy?

As the former Presidential Chief of Staff, Rahm Emanuel, said about the 2008 Housing Crisis, “Never Let a Crisis go to waste.” For example, Warren Buffett made much of his fortune striking during recessions by saying when there is blood in the street is the time to buy. With crises come opportunities.

Low new homes inventory from construction delay from COVID has caused a housing shortage. Some reports have mentioned that working from home has increased the demand for larger houses in the suburbs and locations away from crowded urban areas. The chart below shows the housing new starts in the US over time and displays we are back to pre-COVID levels.

At this time, though, I would be very cautious. Interest rates may be cheap, but we have no idea how serious this will be and how long it will last. With housing starts at pre-COVID levels, the supply will match demand in 4-6 months. Thereby, it’s best to move aggressively to purchase good deals now and be more prudently once the dust has settled.

That being said, there is no reason to turn down an incredible opportunity if they come along. I would add an extra contingency due to the added risk and uncertainty. If you usually would only buy at 70 percent market value, make it 65 or 60 percent—at least until the economic picture becomes clearer.

Should You Refinance?

As mentioned above, this is the perfect time to create and keep substantial cash reserves to weather crises and make the most of the opportunities. That being said, it’s not the easiest thing to do for real estate investors, especially those just starting. But if there’s a way to build up those cash reserves now, it’s strongly worth considering.

There are three good reasons to refinance, those being:

1. As part of a strategy

2. To improve rates/terms

3. To pull out equity

No. 1 If you took a hard money loan to purchase and rehab an investment property as part of your rental strategy, you want to refinance to receive better loan terms as soon as you can.

Right now, both No. 2 and No. 3 would make sense.

Real estate values are starting to increase again, but the most important thing right now is liquidity. It’s critical to have cash in case your cash flow is significantly reduced as unemployment makes it impossible for some tenants to pay rent. So pulling out some equity now to increase your cash reserves is likely a good idea as long as it doesn’t substantially increase your overall mortgage payment.

Speaking of which, with rates as low as they are, it may be possible to take out a sizeable chunk of equity and reduce your payment or tread water. Investopedia recommends that: “It may be wise to refinance if you can lower your interest rate by 1% or more.”

Again, getting a loan in this environment will be more difficult, but that doesn’t mean it’s impossible by any means. This is another reason it’s essential to build relationships with multiple banks. When the going gets tough, some may keep their money sheltered in place, while others will still want to lend. And they’ll particularly want to lend to those they have relationships with.

Should you start investing?

ALWAYS… There is no bad time to get started in Real Estate Investing, as they’re just different strategies that work each economic cycle and in every market.