As real estate investors, we’re all tired of doomsaying. Even last year, before any of us could have anticipated the COVID-19 pandemic and its economic repercussions, experts were already predicting a recession to hit. And hit it did!
While real estate investors do well to take statistics and emerging risks seriously (after all, effective risk management is one of the cornerstones of effective real estate investing!), there’s a balance that must be maintained between caution and optimism.
From the beginning of this modern crisis, we at REI Nation have asserted the need for faith. Faith in the system and model that has proven itself time and time again. We’re not afraid of what the future holds. We’re not fearful of the future of real estate investment. That said, we all would do well to be abreast of the challenges and truths about the state of the real estate industry.
As we’ve seen, the trajectory of the market isn’t always predictable.
Positive Indicators and Challenges Facing Real Estate in 2020
What’s good in real estate?
Price growth & stability — Homeowners and investors alike tend to panic when they hear “recession.” There’s good reason, too. The 2008 Housing Crisis (otherwise known as The Great Recession) saw home values drop by more than a third. We all remember the slew of foreclosures, the jeopardized homeowners who were suddenly underwater on mortgages, and the economic domino-effect that followed.
However, despite the current 2020 recession, we’re not seeing that same effect on real estate. This isn’t a Great Recession repeat. If anything, real estate prices have continued to grow, sustained by a tight inventory (something that has been driving home prices since 2012) and pent-up demand. This is good news for homeowners and investors.
Low mortgage rates — While housing demand has been declining since 2019, according to Reuters, we’re seeing record-low mortgage rates incentivizing refinancing and homebuying. This, along with inventory, has been one of the major reasons the market has remained as stable as it is. Even with demand on a downward slope, mortgage rates at 3.3 percent are attractive and continuing to motivate market activity — be it from construction, homebuyers, or investors.
What risks are emerging?
Unemployment rates — Again, looking to Reuters for our statistics, we see that three-quarters of surveyed market analysts see unemployment rates (at 13.3 percent as of the end of June) as the biggest challenge facing the market. Some point to the lack of affordable homes on the market, while others point to strict lending standards.
Be sure to check out: A Passive Investor’s Quick Guide to Risk Management
Naturally, unemployment poses a big problem. While most of the job losses come from lower-paying sectors of the economy, it will exacerbate the problem — and need — for affordable housing. Government intervention has diverted some of the economic impact thanks to protections against forbearance and nonpayment of both rents and mortgages, but these provisions will expire in time.
Unemployment obviously impacts consumer ability to buy or rent housing. However, it is likely we will see an increase in rental demand, particularly for single-family housing. For the health of one’s investment portfolio, stay up-to-date on the unemployment and economic trends in your markets.
Consumer confidence — In the middle of uncertain times, it’s not surprising that consumer confidence is lacking. Because income, health, and overall economic stability are up-in-the-air for many Americans, they will hesitate to spend money. Not only is a lack of affordable housing discouraging many from even looking for a home, but strict lending standards have made it more challenging for Americans to take advantage of low mortgage rates.
Beyond the direct impact on real estate, a lack of consumer confidence means less economic activity on a broad scale. This can, in turn, continue to hurt employment and slow economic growth.
Of course, will all of that said, the analysts surveyed by Reuters are fairly optimistic about the future of the real estate market. While challenges are present — and investors would do well to manage these new and emerging risks with careful, strategic planning — the overall feeling is that real estate will weather this storm.
Some 60 percent of analysts predict a gradual return to pre-COVID-19 levels for the real estate market. Only three of the surveyed experts see recovery as something long and drawn out. Opinions vary, but the consensus, by and large, is that there will be a level of consistency to future market shifts.
In addition, Reuters declares that even in a worst-case scenario, we will only see a small dip in home prices — perhaps by 1.2 percent this year — or 1 percent in 2021. Overall, the tenacity and stability of the market, combined with promising trends in single-family rental demand, pose both present and future opportunities for passive real estate investors.
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