Federal and state governments are proving surprisingly effective at holding much of the economic fallout at bay, although there will come a point where the price for all of this quantitative easing policy must be paid.
Real estate investors must be ready for the next economic swings and resulting market upheaval. Those who are prepared will be in a prime position to grow their wealth, build their legacy, and support their community.
The “Sandwich Effect” Is Already Trending
Many real estate investors expect much of fall and winter 2020 to essentially consist of markets and economies “on hold.” Because of aggressive rent and mortgage forbearance policies in place for multifamily owners and lenders, many think the onslaught of single-family foreclosures that is likely to emerge at the end of the state-imposed grace period will not hit until 2021. However, prices across the housing spectrum will spend fall and winter adjusting.
This adjustment will include high-end price points softening as owners of top-tier properties find they cannot afford their monthly housing payments and begin to sell off those properties. On the other end of the spectrum, low-end properties will begin working their way through the forbearance process as homeowners realize they will probably have to sell when the grace period ends. Landlords who have either opted not to evict nonpaying tenants or have been legally prevented from doing so will find they either must evict or must sell off their non-cash-flowing assets to minimize further damage to their portfolios. There will be an increased availability (for investors) of attractive, affordable single-family housing to either fix-and-flip or fix-and-rent, and homeowners leaving their current homes will also be competing for the same middle- and lower-tier inventory. This will cause a “sandwich effect” in which the middle part of the market is squeezed but mostly holds firm while the top and bottom tiers get pushed up and down in value, respectively. Naturally, housing affordability will continue to be an issue in most coastal and metropolitan markets, making interior markets and suburban areas increasingly attractive for investors and residents.
So, how will real estate investors know the sandwich effect is starting to manifest in U.S. housing markets? There are three signs to watch for that will indicate market movements in this direction:
- Foreclosures will pick up momentum. Even though prices have been rising in many parts of the country during the pandemic, there will be more foreclosures in the latter half of 2020. This will be an early sign that housing inventory is starting to loosen up.
- The Midwest and Southeast will take the lead. Although no one has really treated the Midwest, in particular, like an economic powerhouse in this century, that is going to change in the coming years. Coastal metropolitan cities have always held the most appeal for “big money” like Wall Street and institutional investors, but now that money is starting to move toward the Southeast and the Midwest, where state governments have successfully navigated economic “re-openings” and there is geographic space for suburban, single-family growth. For example, in major metro areas like Atlanta, Georgia; or Chicago, Illinois; homeowners can have those hot single-family properties while living close enough to commute to work in the city a couple times per week or month.
- There will be less unbiased, reliable data. As the November presidential election approaches, tensions run higher than ever across every demographic divide imaginable, and as news media fragments attempt to garner enough clicks to stay in business, real estate investors will be left with fewer reliable, unbiased sources of data than ever. Fortunately, investors will still be able to access data that does not lie by looking at inventory levels, new construction permitting rates, and days on market. This should give real estate investors an edge over nearly any other industry sector in the coming months because real estate will still have some cold, hard, indisputable data available.
Real Estate Investors Must Not Slow Down
It may be tempting to slow down and try to forget about the “new normal” raging just outside the door. For real estate investors, that temptation could be fatal to business and budget. Now, more than ever, it will be crucial to stay on top of projects and constantly monitor the markets for changes. Communicate clearly and often with clients, buyers, sellers, and contractors to make sure you are all on the same page, and you will find that 2020 can, despite its incredible roadblocks, be the best year in real estate yet.
Tom Olson is the founder and president of The Olson Group of real estate companies and the Good Success Mastermind. You can access the latest edition of his book, Contingency Planning for Your Small Business During COVID-19, and learn more about the Good Success Mastermind and 30-Day Good Success Journey at www.GoodSuccess.com.
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