In April, I shared many articles about my views on our housing market amid the coronavirus pandemic. Three months later, not only has the pandemic in the U.S. not improved, we are now leading the world in the number of COVID-19 infections. During this unprecedented event, even the most renowned economists could not clearly indicate the future of our recovery. We were given all different shapes of economic recovery signals ranging from V-shaped, U-shaped, W-shaped, to potentially L-shaped. I have gathered the most important indicators for the U.S. housing market to help guide your real estate investing.
Our unemployment rate went from a 50-year low at 3.5% in Feb 2020 to an all-time high of 14.7% in April 2020. By June, the jobless rate had dropped to 11.1%. As significant as it may seem, over 75% of the job losses are temporary layoffs and furloughs. In California, FED-ED Extension provides up to 20 weeks of additional unemployment benefits through the Pandemic Unemployment Assistance Program which total up to 46 weeks of unemployment benefits. Many small business owners have reported difficulties in hiring back their employees due to additional CARES-ACT stimulus funds which provide $600 per week in addition to the S\state’s unemployment benefits. However, this additional federal CARES act unemployment benefit is scheduled to end on July 31.
The stock market faced one of the most turbulent and unexpected fluctuations during the COVID-19 pandemic. S&P had plunged 35% from the peak and jumped over 20% for the second quarter. Although S&P is still lower than December 2019 value, NASDAQ reached an all-time high in the midst of the coronavirus pandemic.
The 30-year mortgage rates have dropped as low as 2.75% for conventional loans and 2.375% for VA loans. As a result, homebuyer mortgage demand increased by 33% in the month of July compared to 2019. Freddie Mac, Fannie Mae, and Mortgage Bankers Association have predicted the mortgage rates will remain low until the second quarter of 2021 (Fig. 1). The Federal Reserve had also pledged to keep the federal fund rates close to zero until 2022 or until certain conditions are met.
U.S. Housing Market
This has been one of the hottest topics during the COVID-19 pandemic. During the first four weeks of shelter-in-place, I provided my view on the future of the Housing Market Amid coronavirus pandemic.
Commercial Real Estate
First, the bad news: commercial real estate has been harshly impacted by the coronavirus pandemic. Small retail tenants were affected by the shutdown and many are being kept afloat by the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan program (EIDL) by SBA. Most of these tenants cannot afford to continue paying their rents but they are not able to get out of their leases either. At the same time, larger retailer tenants also applied for the PPP and many of them sent attorney-drafted letters to notify their landlords that they will no longer be paying for their rent payments declaring force majeure. If that’s not the worst, California proposed Senate Bill 939 which allowed commercial tenants in California to not pay rent for an indeterminate amount of time. However, with the strong opposition from landlords and land attorneys stating the proposed bill unfairly put the entire financial liability on the landlords, it did not pass the Senate appropriations committee.
In my previous Forbes article, I shared my outlook on the other commercial real estate asset types.
Residential Real Estate
The initial slowdown in residential real estate activities was essentially caused by a deliberate effort to control the spread of COVID-19 which halted many home showings. As a surprise to many, the residential real estate market (one to four units) mounted a record increase of 44% in pending home sales activities in May after a two-month decline due to COVID-19. In the San Francisco Bay Area where I practice real estate, we have over a 67% increase in sales activities (2348 vs 1407 closed sales) over five counties in June 2020 compared to May 2020.
Several factors led to increased homes sales: the record low mortgage rates and the pandemic altering home value to buyers. Over 35% of the homebuyers are demanding a new floor plan which allows for more rooms and separation, as well as bigger yard space. Work-from-home shows that living close to the office has become less important. Many experts have projected home prices will continue to increase for the next two years.
Should I Invest in Real Estate in the midst of COVID-19?
In the face of this information, many real estate investors have decided to move their money from commercial real estate to residential real estate, particularly, multifamily.
With the economy being shut down partially, most service industries were forced to furlough or lay off their employees which are predominantly renters. It was reported that 32% of U.S. households will miss housing payments, mortgage, or rent payments starting in July when unemployment benefits begin to expire. The fear of non-payments of rents triggered policymakers to introduce an expanded version of the Eviction Moratorium to protect more tenants nationally. It is estimated that 20 million renters will be at risk of eviction by September of this year. The highest evicting rates are in cities located mostly in the Southern region of the United States. The battle between landlords and tenants has become more severe amid COVID-19. Mom-and-pop landlords express their frustration over the government providing extended protection for the tenants but neglecting the livelihood of smaller landlords. Prior to COVID-19, nearly one-third of Americans struggled with housing payments.
Should you invest in real estate?
I held off our multifamily investors to purchase new properties in March and April, but we recently resumed property searches for our clients. Many institutions are still actively buying real estate, because they now have more leverage to negotiate in addition to the record low mortgage rates. However, with the uncertainty of the market, commercial lenders have tightened their guidelines recently which requires more down payment and reserve. The opportunities still exist, but it is more important than ever for us to run a conservative ten-year cash flow analysis for our clients prior to making an offer. We have to remind our clients to offer based on our analysis, not their emotions. Some of you may be thinking about giving up your real estate investing adventure due to a lack of cash, but there are still many ways for you to be involved in real estate investing with creative strategies! As always, please consult a trusted real estate investment advisor to guide you through your real estate investing career.