Making the decision to buy residential real estate is not an easy one as there are endless factors to consider.

COVID-19 and the real estate market

Is it too sick to buy?

Michael Carlin, AIF®, President of Henry+Horne Wealth Management

The drastic market downturn and economic closing sent both professional and retail investors spinning in February and March of 2020. Trying to feel the depth of the market while the economy was in the middle of a shut down, infection and death tolls surging worldwide made the process of evaluating investment options nearly impossible. Investors felt their stomach drop as the roller coaster dip of February and March rocked the markets. Similarly, the rocket propulsion that sent stocks off those March 23 lows was equally jarring as the stock market surged back towards highs in a matter of six weeks.

This roller coaster motion leaves investors scratching their heads about what is real, where the market is headed and what to expect in the coming months ahead. Do I stay invested in the market? Should I look towards investing in real estate, or will the market experience another dip like it did last time we had a recession in 2007-2008?

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I will break down why this time is different with the facts and data I see right now.

The CARES Act, where the government stepped in to increase unemployment benefits temporarily, held back what could have been a difficult situation for residential real estate.

    1. For households making under $100,000 per year, the amount of annualized income received on unemployment exceeded earnings while working.
    2. For households between $120,000 and $140,000 of income, the unemployment income is relatively close to the income they enjoyed while working full time.
    3. As a result, even expensive home markets like California, or more reasonable real estate markets like Washington, the rent to unemployment income ratio remained stable across the board due to the increase in unemployment income through the Cares Act.

Homeowners are in a better equity position this time around. If you recall in 2005, 2006 and 2007 home prices fell apart due to easy loan practices, offering home loans to people who weren’t credit worthy and offering too much debt without much in the way of a down payment. In this market, our homeowners are in better shape, so don’t expect the panic experienced the last time around.

    1. 34% of homes have no debt
    2. 63% of homes have positive equity
    3. Only 2% of homes have negative equity

Home inventories are tight. In difficult economic times experienced in the 1990’s, low home inventories saved the day, preventing a collapse in home prices. Comparatively speaking, our home inventories are even lighter now which bodes well for supporting residential real estate prices.

Mortgage rates are historically low. How low? As in forever lows. The big picture here is that as mortgage rates are historically low, it helps make buying higher priced homes more affordable.

The home affordability index is the best it has been since 2017. Taking into consideration total income, which has risen the past few years, home affordability is very much in a favorable zone.

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Another reason that came into play, but hasn’t seen it’s full effectiveness yet, is forbearance. The historic unemployment situation that saw all of the job gains made in ten years wiped out in a matter of weeks should have wreaked havoc on the residential real estate market. For those homeowners finding themselves in trouble, forbearance stepped in to save the day. Total homes in forbearance was expected to reach 15% of all outstanding mortgages. However, as of May these figures where in the 7-8% range. The big picture is forbearance allowed us to avoid a series of potential landmines in the residential real estate sector, holding up home prices.

So real estate prices held strong. Got it. Now what do I do?

Not all real estate markets are the same. For anyone invested in real estate, you understand how critical the proper geographic location can be to finding lasting financial success. There are a few trends I would point out and pay attention to:

  1. The trend of leaving urban areas continues and is likely expedited by COVID-19. Going back to 2015, the rate of growth in urban areas has sequentially declined from 8% to a paltry figure that is dancing right about 0% in 2019. The expected 2020 numbers may in fact print a negative given the COVID-19 outbreak and desire for space.
  2. Millennials are starting to formally form households. It’s about that time for the Millennials to start buying homes and start families. These demographic trends have a way of dominating the real estate market in much the same way the Baby Boomers pushed real estate prices in the early 1980’s, one can expect the home buying Millennial generation to have a substantial impact on today’s real estate market. There again, be sure to consider homes that are priced and designed for Millennial needs. Not all real estate will work for this particular subset of American society.
  3. What does the local job market look like? If the home you are considering buying is surrounded by a low risk (high quality) job market, that is a nice premium and hopefully positive factor supporting your home price. Similarly, in the post COVID-19 world, there are job markets filled with higher risk jobs in fields such as hotels, restaurants, arts and recreation etc that may take more time to come back to pre-virus levels. Not all job markets and residential real estate markets are created equal.

Making the decision to buy residential real estate is not an easy one as there are endless factors to consider. There are several reasons why residential real estate didn’t take a hit even as the economy was in the middle of a shut down. As you consider buying real estate you know the three key factors I identified to help figure out where to invest in a post COVID-19 world.

Also consider that residential real estate is not a liquid investment. The cost of getting in and out is expensive. The best way to successfully invest in residential real estate is to find extreme values which can occur even during a strong real estate market.

I cannot give blanket advice for everyone reading this article, but if I could be so bold to suggest a path forward it would be – keep your money invested and liquid. Search to identify homes in quality markets, and if there is an opportunity that comes up, use some of that liquidity to jump on a property that will hopefully make money and produce consistent rental income (or appreciation if you plan on living there).

For more information and resources on COVID-19, see our coronavirus page. Feel free to contact your Henry+Horne tax adviser with any questions.

Michael Carlin, AIF®, is the President and Founder of Henry+Horne Wealth Management. He can be reached at (480) 483-3489 or MichaelC@hh-wm.com.

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