What Could Record-Breaking Unemployment Mean for Real Estate Investors?
As of October 2020, the unemployment rate reported by the US Bureau of Labor Statistics (BLS) was 6.9%. That’s much better than what it was in April of 2020 when the coronavirus pandemic caused the unemployment rate to skyrocket to 14.7% from 3.5% after over a decade of gradually returning to pre-Great Recession levels.
Meanwhile, the S&P 500 plunged from 3,386.15 points to 2,237.4 points from February 19th, 2020 to March 23rd, 2020, before both rebounding over the next several months and setting a new record high of 3,508.01 on August 28th, 2020.
During this time, the coronavirus pandemic inflicted 9.76 million infections and 236k deaths upon America, although the actual figures will never be known.
Given all these ups and downs, investors may wonder: how has the real estate market been doing this entire time?
That’s because all of these figures don’t necessarily correlate with the supply of and demand for real estate. For this reason, the significance of all this data has to be teased apart to appreciate its impact on the real estate market properly. It’s genuinely a four-part question until it isn’t.
How has record-breaking unemployment affected the real estate market?
The unemployment rate skyrocketed as soon as shelter-in-place measures were instituted. As a result, it is reasonable to expect an overabundance of distressed real estate.
While many office spaces, hotels, and retail properties did, in fact, flounder, residential spaces, for now, have been able to mostly avoid foreclosure or being put up for sale by their owners.
Residential real estate, generally, is enjoying high prices and high sales because of:
- Low inventory
- Historically low mortgage rates
- High demand
However, that doesn’t mean that you should be making any big moves right now in an attempt to take advantage of the situation. That’s because there’s a great deal of uncertainty.
How much uncertainty is there in the real estate market?
On Thursday, November 5th, 2020, CNN reported over 120,000 new coronavirus infections across the United States. It was a new record high, surpassing a previous record that had just been set days earlier.
Congress will have to act fast to deal with the worsening pandemic because state-based eviction moratoriums like California’s AB 3088 expire soon (February 1st, 2021), and so does the CDC’s nationwide eviction moratorium (December 31st, 2020). There is, additionally, a government funding deadline on December 11th, 2020, which adds even greater urgency to the situation.
It’s possible that if federal, state, and local governments don’t take sufficient action that the worsening coronavirus pandemic will affect the real estate market by creating an abundance of distressed residential properties.
How could the worsening coronavirus pandemic affect the real estate market?
When the coronavirus pandemic began, many investors and tenants could dip into their savings and adjust their budgets to accommodate reduced income. The government also took measures to provide rent relief, which led to income for landlords. However, many investors and tenants have less savings, leading to even more distressed residential properties if there are inadequate government relief and unemployment returns.
How should you invest during the worsening coronavirus pandemic?
Given that the real estate market is doing well but rests in the shadow of uncertainty, right now is a good time to stick to what’s been working for you and not take any big chances. You don’t want, for example, to try out wholesaling for the first time only to end up stuck with a property you can’t move.
So, play it safe:
- If you find a great deal, go in on it.
- If you want to have more cash on hand, consider:
- Selling a property.
- Cash-out Refinancing
If you want to experiment with new strategies or take some chances, wait for the pandemic to pass or go in with a more experienced partner.
If you’re going to have new tenants, consider making your criteria more strict:
- Higher credit score.
- Income minimums.
- Increased security deposit
- Check references
- Previous landlords
Playing it safe also means keeping your investments in real estate rather than turning to the stock market.
How does record-breaking unemployment and the coronavirus pandemic affect the stock market?
When investing in real estate, you want to compare your cash-on-cash returns. This is the measure of how much money your money makes you with the dividend yields produced by real estate investment trusts (REITs) or companies that financially back or own real estate that you can buy on the stock market. Given how much work it is to invest in real estate, if you get better returns from a REIT than the potential property, then the investment isn’t worth it.
However, what compels people to invest in real estate isn’t that the return is much greater, but that the return is more stable and secure. In general, real estate is less volatile than the stock market. It also has a low correlation with the stock market, making it an ideal place to park one’s money during uncertainty or volatility periods.
Right now, the stock market may look appealing because of its record-setting numbers, but that doesn’t mean it’s not volatile. The reason the stock market has been doing so well lies in the way technology has been reshaping society. As reported by Eric Levitz of NY Mag:
- E-commerce has been replacing a lot of retail.
- Automation is replacing a lot of warehouse employees.
- Tech companies disproportionately impact the S&P 500
This means that tech companies, which were already best prepared to survive the coronavirus pandemic, were also most likely to prosper during the pandemic. As smaller businesses shutter their doors, many tech companies stand to gain more from having less competition. And the sectors that suffered the most because of coronavirus, like airlines and leisure, constitute between 10 to 20% of the S&P 500.
So, don’t go selling off your real estate just because you’re worried about unemployment and the coronavirus pandemic. The stock market may prove to be more volatile in the short term, and if you’re not an experienced trader, you may not have the stomach for that.
All this information is a snapshot of the situation as it appears right now. The coronavirus pandemic is expected to be worse in the winter than in previous months and potentially harder to weather due to its toll on the general public. If that happens, then many tenants will remain unable to pay their rent in full, and many landlords may be unable to meet their mortgage obligations.
Without state or federal aid, this could mean a lot more distressed residential properties that, in turn, can be purchased by investors like you. An increased supply of homes could lead to a decrease in price in many markets, improving cash-on-cash return (CCR) for investors. CCR can also be enhanced by investing in Class C or Class D properties.
So, be vigilant. With the right approach, you can turn uncertainty into an opportunity for success!
So, if you’re worried about weathering the pandemic, now is an excellent time to sell off some properties to make a nice return and have cash on hand that you can use to buy up properties at a below-market rate. Take advantage of our free resources like such as our rental returns calculator and free rental analysis tool to determine if an investment property fits with your strategy!
Thank you for getting in touch!
In the meantime, learn more about ways to start with a smaller downpayment here.