Jump To:
- Why now is a good time to invest in real estate
- How the Coronavirus is impacting the housing market
- What the market may look like after the Coronavirus
We are living in uncertain times, as evidenced by the global pandemic currently playing out with the Coronavirus. The entire U.S. economy is essentially at a standstill, as local governments have issued “shelter in place” orders to combat the spread of what has been dubbed COVID-19. Everything we have grown accustomed to in our daily lives has seemingly changed overnight with a flood of Coronavirus news. With the country’s economic future still unknown, many are asking, “What is going to happen to the real estate market?”
While no one can predict the future, I have been successfully investing for over 15 years in up, down and flat markets. Even though the answer of what’s to come isn’t certain, there are many strong indicators that real estate is still an extremely viable investment. At the same time, we have seen volatility in other investments including the stock market, which witnessed massive drops in the face of historically high unemployment numbers.
In a world full of questions, the real estate industry has remained relatively intact and looks perfectly capable of helping investors weather the storm onset by COVID-19. Keep reading for our expert breakdown of coronavirus and the real estate market.
Why Is Now A Good Time To Invest In Real Estate?
Many people are starting to see that only relying on a job is a very risky position. Not only does the prospect of real estate investing rid oneself of being dependent on a 9 to 5 job, but the evolution of today’s market appears to be creating opportunities investors haven’t seen in years.
In light of recent events, investors can expect a number of positive indicators to work in their favor for the foreseeable future, not the least of which include:
- Lower interest rates capable of boosting buying power and maximizing returns.
- More opportunities to buy distressed assets and increase profit margins.
- Cash offers which allow investors to navigate around timely, overburdened bank transactions.
- Short-term price volatility that could potentially result in lower acquisition costs.
While these are just a few of the reasons the current market is attractive to new and experienced investors alike, they are far from the only reasons someone should consider real estate investing. In fact, there’s one more primary reason the world of real estate investing is so attractive: the potential for long-term financial freedom. History has taught us that real estate is one of the greatest wealth-building vehicles investors have at their disposal.
Three of the last five recessions in the U.S. witnessed home prices that increased 1.9% – 4.8% on the rebound. If the economic impact from the coronavirus follows a similar pattern we may be poised for a strong rebound when the economy stabilizes once again.
Additionally, home flipping profits have increased year-over-year for more than a decade. The latest Home Flipping Report released by Attom Data Solutions highlights the success real estate investors have had as recently as last year, reporting that homes flipped in the third quarter of 2019 generated a gross profit “up 1.8% from the previous quarter and 3.5% from a year ago.”
Real estate has proven it can help hard-working investors achieve financial success in any market; up or down. Whether homes continue to appreciate or they are caught in a downturn, there’s an investment strategy to maximize any situation. That means plenty of investors will find today’s market perfectly suitable for a number of exit strategies, and there’s no reason you couldn’t either.
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Coronavirus Real Estate Trends
The full impact of the Coronavirus has yet to be witnessed, but after a month of watching the new market take form we’ve seen some staggering insights. In particular, the U.S. has seen a record number of citizens file for unemployment. As of April, MarketWatch reports, “Some 3.8 million American workers who just lost their jobs applied last week for unemployment benefits, bringing a record number of layoffs during the coronavirus crisis to about 30 million in a month and a half.”
Although when the economy starts up again many of these individuals will be trying to find new jobs, we still are most likely to see an influx in foreclosure activity onset by economic recoil. Nonetheless, while the entire country is feeling the impact of COVID-19, certain real estate trends are already starting to emerge.
Here are a few of the trends markets are already seeing with the Coronavirus and the real estate market:
- Coronavirus And Mortgage Rates: Mortgage rates have dropped in an attempt to stimulate more transactions.
- Coronavirus And Foreclosure Rates: While it’s too soon to tell what the Coronavirus means for the foreclosure industry at the moment, it’s likely there will be a spike in filings once government forbearance programs run their course.
- Coronavirus And Real Estate Closings: Banks and loan originators are already anticipating delayed closing times as a result of the lack of available workforce.
- Coronavirus And Real Estate Prices: Prices have yet to experience much volatility and could drop in the short term, but it’s more likely the lack of inventory will continue to push prices up.
Coronavirus And Mortgage Rates
In an attempt to mitigate the financial impact of the Coronavirus and fuel future transactions, the Federal Reserve took swift and unprecedented action. No more than halfway through March, the Fed dropped its benchmark interest rate to 0.0% —its lowest level in half a century. The move was designed to stimulate the economy and salvage one of the longest-running bull markets in history.
Dropping the benchmark index to zero would help the broader economy more than the mortgage industry. Mortgage rates tend to mirror the yield on 10-year Treasury notes more than the Fed’s benchmark index. As a result, mortgage interest rates were already low because of the market’s downturn. Therefore, it’s not solely the Fed’s decision to drop its benchmark index to 0.0% that has caused mortgage rates to drop in March, but rather the unique combination of Treasury notes, the new low bar set by the benchmark index, and the state of the national economy.
As social distancing continues and “shelter in place” orders remain in effect, it’s entirely possible for mortgage rates to drop even further. Despite already hovering around record lows, there’s no reason mortgage rates couldn’t sink as low as 3.0%. While nobody can say exactly where mortgage rates will be in one week’s time—let alone a few months from now—it is reasonable to suspect they will be very attractive.
Attractive mortgage rates have persuaded traditional buyers to purchase homes for years, which begs the question: What does the prospect of even lower rates mean for real estate investors?
Investors who stand to benefit the most from today’s interest rates are those with long-term intentions. Buy-and-hold investors, in particular, are in a unique position to capitalize on the low mortgage rates resulting from today’s market uncertainty. Whether they are able to refinance to today’s rates or acquire a new loan with incredibly low borrowing costs, lower mortgage rates will undoubtedly contribute to long-term profit margins for investment properties. Those looking to refinance would be wise to lock in rates if they continue to decrease over the next couple of months.
The Coronavirus’ Impact On Foreclosures & Evictions
While the decrease in mortgage rates is currently attractive for buyers and refinancers, not everyone is looking at mortgages from the same perspective. What about those who can’t afford to pay the mortgage they already have because of hardships brought on by the Coronavirus?
Unfortunately, some people stand to be negatively impacted by a downturn. Whether that means being furloughed or losing a job entirely, the resulting lack of employment could force millions of Americans into financial hardships. Fortunately, there’s help on the horizon: A number of government-sponsored enterprises have been instructed to place a moratorium on mortgage payments in the event borrowers suffer financial hardships.
For example, Fannie Mae and Freddie Mac have been ordered to suspend all foreclosure actions and evictions for at least 60 days because of the coronavirus national emergency. To be clear, the suspension of the foreclosure process only applies to certain government-backed loans. Fortunately, this moratorium (which includes VA loans and those backed by the FHA) will help the majority of homeowners in the United States.
“This foreclosure and eviction suspension allows homeowners with an Enterprise-backed mortgage to stay in their homes during this national emergency,” said FHFA Director Mark Calabria.
The Department of Housing and Urban Development has also announced they will do what they can to ease homeowners and renters.
These actions will provide short-term relief for a great deal of renters and homeowners, but they may simultaneously provide a false sense of security. While mortgage forbearance programs will prevent financially strapped homeowners from losing their homes for now, they won’t last forever. Those who weren’t able to keep up with their mortgage obligations may be expected to pay all of their missed payments in one lump sum once the allotted forbearance periods expire.
“More than 6 percent of U.S. mortgages are in forbearance as Americans struggle to keep up with home loan payments amid the coronavirus pandemic, according to projections,” reports The Hill. “That is roughly 3.4 million home loans across the country that have been granted payment delays by banks and lenders as millions of Americans face daunting financial futures because of COVID-19.”
As a result, the United States real estate market may witness an influx of new foreclosure filings once mortgage forbearance programs run their course.
Data presented by CoreLogic as recently as January, suggested the U.S. had finally moved on from the foreclosure crisis resulting from the Great Recession in 2008. Nationally, “3.7% of mortgages were in some stage of delinquency (30 days or more past due, including those in foreclosure) in October 2019,” according to CoreLogic’s Loan Performance Insight Report. “The October 2019 foreclosure inventory rate tied the prior 11 months as the lowest for any month since at least January 1999.”
Real estate investors who position themselves to take advantage of the impending influx may find the next few years to be ripe with investment opportunities. The potential increase in foreclosure filings will likely allow investors to secure deals below market value, not unlike the period following the Great Recession. There’s no way of knowing the potential volume investors may expect, but now would be a good time to prepare a game plan, line up contacts, and funding in order to capitalize on what’s to come.
The Coronavirus’ Impact On Closing Schedules
Shelter in place orders have significantly reduced the amount of people allowed to work, and the financial sector is no exception. With many of the banks closed to the public, the employees responsible for facilitating every step of the closing process are now harder to get in touch with. There simply aren’t enough staff to meet what appears to be healthy demand for the time-being.
Unfortunately, it’s too soon to tell how long the Coronavirus may end up delaying most real estate closings. After all, the average closing takes anywhere from 50 to 60 days. As we are just over a month into the “shelter in place” order, it is safe to assume we won’t start to see the real impact of delays for another 30-60 days or so. Nonetheless, banks have already been proactive in anticipating delays.
Bank regulators have already announced they are “giving lenders more time to conduct appraisals on real estate transactions, in an effort to keep firms lending amid widespread ‘stay-at-home’ orders,” according to Reuters.
Many traditional lending institutions, for example, have been granted an additional 120 days after closing a deal to tie up loose ends like appraisals. The move is not only an acknowledgment that banks expect to experience a bottleneck in the coming months but also an attempt to keep borrowers borrowing.
Outside of delays brought about by working with banks, buyers and sellers need to be increasingly more aware of coronavirus-related contingencies and addenda. Most notably, it’s becoming commonplace for contracts to be contingent on whether or not a buyer can be present at closing due to travel restrictions. And while a lot of current contingencies may not name the Coronavirus specifically, there’s an increase in the number of financial hardship contingencies.
While this could impact some potential buyers, these delays may actually work in favor of an educated real estate investor. Because investors often pay in cash to close quickly, they can bypass lengthy bank operations and their offers will likely be more competitive and attractive to sellers. Sellers who would rather not deal with increased wait times and questionable closure trends will almost certainly favor cash offers over borrowed money. Perhaps even more importantly, it’s entirely possible for a cash offer (especially in today’s environment) to result in a lower purchase price.
Coronavirus And Real Estate Prices
According to Zillow, the median home value in the United States was $247,084 by the end of the first quarter of 2020. To the surprise of many, today’s median home value still appears to be on the same upward trajectory as it was for the better part of a decade.
That said, the Coronavirus and the real estate market is still a relatively new phenomenon with no guarantee where real estate prices will be a few months from now, let alone a year. What we do know, however, is that studies of previous pandemics suggest home prices won’t crash like they did during the last recession. The 2008 market slowdown was much different, as it was driven by bad lending practices to unqualified buyers, stated income loans, and predatory lending practices.
Instead, our current economic downturn was created by a health crisis, and many are predicting it will act differently, with a quicker rebound. It may even be more likely that prices will continue to increase in the face of pent-up demand and an even more limited supply of inventory. Years of insufficient inventory levels have historically created bidding wars, increased competition, and drove prices higher.
The homes that have been placed up for sale in recent history have demanded a premium, and there’s nothing to suggest the foreseeable future won’t bring about the same economic environment. In fact, more homeowners have retracted their listings in the wake of the Coronavirus, which could potentially increase demand for the select homes that are made available.
According to RedFin, supply is declining. “Americans who had been planning to sell their homes are increasingly taking them off the market amid heightened economic uncertainty and record-high jobless claims. There was a 148% year-over-year increase in delistings during the week ending March 29, 2020, translating to a total of 28,140 homes. During that seven-day period, nearly 4% of homes were removed from the market, about twice the typical rate,” said the nationally recognized real estate company.
Pulling homes off the market at a rapid pace, in conjunction with historically low-interest rates and increased demand, should continue to drive prices even higher. That’s not to say prices are guaranteed to continue rising, but rather that they are likely to remain steady.
U.S. Real Estate Post Coronavirus
As I’ve previously stated, nobody knows exactly where the U.S. real estate market will be once the Coronavirus has subsided, or even how long it will take. What we can do, however, is continue to monitor emerging trends and evaluate the current market based on past experiences.
That said, I am confident the real estate market and investors alike, will be able to adapt and evolve like we always have. These unprecedented times will not only test us as investors but also strengthen our resolve. It is those of us who learn from what’s happening that will be able to thrive moving forward. Investors, who are able to adapt to the changing market will find themselves ahead of the curve, which begs the question: What will the real estate market look like when this is all over?
Roughly a month and a half into the countrywide lockdown, demand for housing hasn’t seen much of a decline. People intent on buying appear ready, qualified, and willing to follow through with their plans sooner rather than later. However, some states have deemed the real estate industry as “non-essential,” which has created a bottleneck in the shopping pipeline. As a result, the activity we usually see in the spring and summer months could be delayed. Whether that’s in summer, fall or winter has yet to be determined, but we may see a great deal of activity when it does.
When the market does pick up again, it will likely do so gradually, as many people will continue to practice social distancing. While people grow more accustomed to conducting business from home and online, it is safe to assume the trend will carry over into real estate. Not only will online searches become more prevalent, but also will online home showings and tours. We have already seen in-person home tours drop considerably, as data from ShowingTime tells us in-person home showings have decreased by almost 50% from the beginning of the year.
As a result, video and chat tours have begun to rise in popularity. “Redfin saw a 494% increase in requests for agent-led video home tours during the third week of March, following an 80% increase the prior week. As of March 30, about 30% of tour requests made on Redfin were video-chat tour requests, up from 0.2% at the beginning of March.”
Investors at the forefront of this technological trend could very easily position themselves well ahead of the competition, meaning now is the perfect time to build your online presence. Integrating online apps like Matterport and other virtual-touring software into your daily routine will help to set yourself up for success. An investor that can give a buyer an in-person feel and experience while that buyer is online at home will win.
The investors who are able to translate today’s evolving trends into tomorrow’s disruptors will be the most likely to reap success moving forward.
Summary
While the Coronavirus is shifting the real estate market, today’s most educated real estate investors should see the new environment as an opportunity, rather than an obstacle. Change isn’t necessarily bad—if anything, it’s a new chance to disrupt an entire industry. Real estate investors who learn how to adapt to the new environment may find themselves in a great position to weather the storm and come out on the other end even stronger.
Now—more than ever—people should be looking to secure their future, and there’s perhaps nothing more capable of doing so than investing real estate. On the one hand, real estate has proven to be one of the greatest wealth-building vehicles in existence; on the other, it may be the catalyst people are looking for to remove themselves from their nine to five desk jobs and stop depending on others for their primary source of income.
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