At the beginning of November, tech-giant Apple announced a $2.5 billion-dollar pledge to address the housing crisis in California. Apple is just one of several major companies that are trying to address the availability and affordability crisis. Over 2019, Facebook, Google, Amazon, and Microsoft have also pledged billions in funds to tackle the housing issue in Silicon Valley and Seattle.
It’s no secret that the nation is facing an escalating affordability crisis. In 2012, some 76 percent of homes were considered “affordable” for a typical, average American family. By the end of 2018, that share had dropped to 56 percent.
By and large, the cause behind the affordability crisis is the relative lack of income growth compared to home price growth. In many primary markets, this has led to an increasing crisis among average working Americans — notably, teachers, public servants, and service workers. In California, many being forced out of their communities by the sheer unaffordability.
In the words of Apple CEO Tim Cook, “Affordable housing means stability and dignity, opportunity and pride. When these things fall out of reach for too many, we know the course we are on is unsustainable, and Apple is committed to being part of the solution.”
For those of us with a vested interest in real estate, it’s incredibly valuable to pay mind to these issues. Not only can they inform our market and investment choices, but they help us predict that ebb and flow of the market.
3 Ways Real Estate Investments and the Housing Crisis Affect One Another
The relationship between real estate investments and the housing crisis can sometimes seem like a “chicken or egg” situation. It can be difficult to distinguish which is responsible for what, or if an issue in one causes a problem for another. That said, the relationship between the two is undeniable. The housing crisis affects real estate investments and vice versa.
Perhaps the most obvious issue created by the housing crisis is that of market stability. There was a time post-recession when we all wanted to see our markets growing in value. When the housing market crashed, the recovery of value and cost was necessary. In many ways, real estate investors facilitated recovery by buying and spurring on demand.
That said, when we look at markets like Los Angeles, Sacramento, New York, and Seattle, we see demand that is out of control. This isn’t necessarily connected to real estate investors, but the industries in the area (such as Silicon Valley companies and ones like it) have created such demand and a standard of living and housing that other industries can’t compete with. There’s a growing disparity. That disparity results in thousands leaving their communities due to unaffordability.
Be sure to check out: What Makes a Rental Market Worth Investing In?
As a real estate investor, market stability is crucial where you invest. You want to know that demand is consistent, the population is growing, and that you can sustain long-term renters. In areas where unaffordability is such an issue, accomplishing these things — particularly for “high quality” rentals targeting the average family — is more and more challenging.
That’s why Memphis Invest personally targets secondary markets that do not face an unaffordability crisis on the same scale. While our properties are premium, we answer existing demand in our markets.
When buying a home is unaffordable, you rent. When renting is unaffordable, you go somewhere else. While growing home prices have resulted in a higher demand for long-term rentals, it should be noted that even rents have become unsustainable in many areas. Rental demand is high, so prices naturally get higher.
While this is profitable for investors, there is a balance that must be maintained. Tim Cook mentioned the unsustainable nature of the California real estate market, and that is what we (as buy-and-hold investors) want to avoid. The cost should not be so great that it pushes average Americans out of the picture.
One of the major contributing factors to the inventory squeeze nationwide is the growing popularity of short-term rentals. Airbnb has been connected to the shortage of long-term rentals. Ultimately, people need long-term rentals — homes to live in for years — and not short-term vacation stays.
Economists warn that Airbnb and like platforms don’t provide long-term net benefits for the communities in which they’re located. This also decreases available inventory not only for homes, but for long-term rentals and investment opportunities for buy-and-hold owners.
These are all factors that converge to make the housing market more difficult to navigate — both as an investor and a buyer.
How to Respond as a Real Estate Investor
There are a few ways an investor can sustain their portfolio without treading into dangerous territory. Part of our response needs to come from thoughtfully selecting our markets. At Memphis Invest, our markets are selected not because they are “hot” or primary, but because there is existing demand on top of a framework for economic stability and long-term residents.
For the real estate investor looking to be passive or buy-and-hold, secondary markets offer more stable, reliable opportunities. Just because a market is expensive doesn’t mean it makes a worthy investment. Focus on maximizing your capital through diverse properties and markets.
We’ve already identified some of the best properties in the best markets for turnkey real estate investors. The heavy lifting is done — you just have to get started.