The game-plan during this unprecedented time

The gameplan during this unprecedented time
Published on May 13, 2020,07:00 am by Stuart Gethner for

There has been much conversation on how COVID-19 will affect our country's residential real estate market. As real estate investors, we want to have current information with accurate updates so that we can make informed decisions. Let’s take a quick look backward before we look ahead.

Never in my lifetime have I seen a government shut down its economy due to a pandemic. When the Spanish flu invaded our country in 1918, over 675,000 people died. Just like the Spanish flu, the coronavirus pandemic’s impact on communities and regions was not uniform across the country. As Thomas Garret points out in his report, “Economic Effects of the 1918 Influenza Pandemic,” “Pennsylvania, Maryland and Colorado had the highest mortality rates, but these states had very little in common.”

From this historical context, can we discern that different areas of our country will experience different impacts and therefore outcomes?

The past decade has been stellar in both the residential and commercial real estate markets. The stock market had experienced unprecedented growth and new highs. One would think companies should have cash in their bank accounts. What a wonder to see how many large and small businesses applied for the Payment Protection Program along with the overwhelming loan applications for the SBA’s Disaster Relief Loan. Remember, you can run a business with a loss, but you cannot run a business without cash flow.

In vacation areas, there are investors who own multiple vacation rentals who will not be able to make more than one or two of their mortgage payments. There are many small investors across our country who have invested in multifamily. Some will not capture enough rents to meet their lender obligations. So, there will be upcoming deals for investors who can evaluate swiftly and fund quickly. These opportunities will be available for anyone who has access to cash, regardless if they’re large investors or small investor groups who pool their capital.

There are some obvious challenges currently facing buyers and sellers. For example, appraisers are not allowed out of their homes in some parts of the country due to shelter-in-place orders. And some folks simply don’t want those appraisers trampling through their home. Open houses are reduced to nonexistent in many areas due to social distancing, along with sellers not wanting potential strangers/buyers in their homes. These conditions will stall loans and, hence, closings for those transactions.

Flippers, however, do not care if appraisers or buyers trample through their flip at 10 a.m. or 10 p.m. So, those transactions will get to the closing table as long as lenders don’t tighten requirements. Chase recently announced new lending requirements for conventional loans — 20% down and a minimum 700 FICO score. The president said he was relaxing underwriter requirements for government loans for specific items (i.e., recent pay stubs, seasoned funds, etc.) to keep this industry fluid. If that happens, which I have my doubts, then these loans will close. If these requirements are not lifted, we will see a dip in sales as well as a longer timeline for a lender to close.

First-time homebuyers often have either young kids or older parents and don’t want to chance contributing to the spread of this contagious virus to these family members. That, along with many of them working from home, taking salary cuts or, even worse, being furloughed, is another challenge unique to this time. The National Association of Realtors reports existing-home sales fell 8.5% in March following a February that saw significant nationwide gains, according to. Each of the four major regions reported a dip in sales, with the West suffering the largest decrease.

The Fed rate is zero and probably won’t go much lower. So, the cost of money is still cheap. Access to that money, however, is a different story. The Department of the Treasury is responsible for distributing those individual $1,200 checks the government is giving away. It is also responsible for sending out millions of monthly Social Security checks along with its collection responsibilities. Delays in those checks getting out are due in part to the IRS’s antiquated software and staffing shortage, plus the accompanying task of working through the banks distributing billions of dollars to small businesses. So, the flow of money is going to be stalled, leading to two quarters of negative growth. Economists call two consecutive quarters of negative growth a recession.

Elsewhere, the French government is directly supporting businesses’ payrolls. In this scenario, rents will be paid along with jobs staying in place for when this pandemic is behind us. I admire this approach. Rather than creating government bailout programs, this strategy tries to give some semblance of normalcy to people’s cash flow. Taxpayers continue to receive paychecks that are deposited into their bank accounts even though they’re not working. This creates at least four positive outcomes: It alleviates the pressure on unemployment benefits. Jobs are held in place, and they’re waiting for workers upon their return. Plus the government isn’t burdened with excessive debt.

If I learned anything from 2008, it’s that real estate investors, large and small, will lead us out of the upcoming real estate rut. Many investors are in a cash position. Others will continue to have access to short-term loans along with established credit lines at big-box stores. I do not believe real estate prices will tank as they did in 2008 since the purchase of most personal residences in our country has not been overleveraged. But, there will be a slight decrease in price by those motivated to sell. The pandemic has temporarily shut down parts of our economy, and there will be an opportunity for all types of investors to fuel the rebound in a very short period of time.