Real estate is being clobbered by the Coronavirus. If you’ve been saving up a down payment and preparing to buy in 2020, what should you do now?
The pandemic—and the recession it’s causing—is going to get worse before it gets better. What does that mean for you?
It means that there will be incredible buying and investing opportunities at historically low prices as this pandemic drags on.
Here’s exactly how to capitalize and profit from real estate during the Coronavirus.
Should You Buy Real Estate During the Coronavirus?
I was recently asked this question on my Instagram account and it is an critical one, because the Coronavirus has the potential to plunge the real estate market as dramatically as the 2008 housing collapse.
Why is this? It’s because most properties are purchased using a mortgage (leverage) and mortgages require that people make payments on them. When payments don’t happen, borrowers default and properties go into foreclosure.
Within the U.S., umemployment claims have reached an astounding 26 million since the pandemic hit only five weeks ago. Some economists are now predicting that America could reach a 25% unemployment rate by this summer. A spike in unemployment like this has not happened since the Great Depression in 1933. Yikes.
Thankfully, due to the severe and swift nature of the Coronavirus recession, many lenders are now offering mortgage payment suspension without consequences.
This measure alone will help to protect nearly 50% of the home loans within the United States.
The Problem of Deferred Mortgage Payments
Unfortunately, deferring mortgage payments does not solve the problem of borrowers not being able to pay their mortgages. Plus, it limits the amount of cash flowing through to lenders, which presumably, will cause lending restrictions over time and lead to increasingly strict standards for borrowers.
Pair tightened lending standards with severe pay reductions and the sweeping job losses taking a grip nationwide, and the amount of people who qualify for home mortgages will sharply decline.
Naturally, as demand for home buying decreases, so will the value of properties across the U.S. While no one can predict the future, it’s reasonable to assume we will see substantial price drops in most residential real estate markets nationwide.
Thus, if you have money saved right now, it is my opinion is that should you not invest in buying a house—either as a primary residence or as an investment—until properties in your market drop substantially in price, stabilizing at a “new normal” for the Coronavirus era.
Another powerful force affecting real estate during the Coronavirus is that the number of people living under a single roof is increasing day-by-day.
First, partners who are living separately are consolidating to a single residence to save on housing costs. Second, individuals with spare bedrooms are having other people move in to lower their monthly rental payments (friends, family, even renters found online). Third, younger people who are experiencing job loss or income constriction are moving home to their parents.
In aggregate, this is contributing to a higher supply of properties within the residential real estate rental market.
The AirBnB Effect
Then, of course, we have the Airbnb effect. With the lockdowns hitting state-after-state throughout March 2020, the short term rental market disappeared overnight. Literally, poof. It was gone.
Thus, the majority of people who own Airbnb properties are trying to make their short-term rentals long-term rentals. Again, this action is flooding the residential rental market with inventory.
Plus, many AirBnB hosts have multiple mortgages. AirBnB “Super Hosts” commonly hold mortgages on five to ten properties. Without the income to make payments on these loans, many of these property owners will struggle to make payments.
Some lenders may be flexible with these borrowers, but again, this comes with downstream consequences. As described above, when lenders don’t collect payments, it becomes difficult for them to facilitate new home loans at fair terms and at normal volumes.
Thus, it’s reasonable to assume that lending practices are going to tighten as the Coronavirus pandemic drags on, requiring borrowers to have a substantial down payment, a low debt to income ratio, a strong credit score and a secure income source.
Add in the severe job loss of 26 million unemployment claims to date and it’s possible that interest in home loans could hit historic new lows.
How The Coronavirus Will Affect Home Mortgages
Of course, people are not going to want to move a large chunk of their savings into a down payment during the Coronavirus either. During a recession, people need cash to feel secure.
Plus, a primary residence is technically a liability, because you are the one paying the mortgage, insurance, taxes, repairs and maintenance on it. Meaning, your primary residence takes “money out of your pocket.”
This is a risky time in history to be taking on a new liability to the tune of several hundred thousand dollars, wouldn’t you agree?
What we don’t yet know is how many people will list their properties for sale. This is a bit tricky to determine, because during the lockdowns, most people will want to stay put. However, if job losses are severe, some families may be forced to liquidate their primary residence to cash out the equity.
Real Estate Deals And Steals (COVID-19)
The upside of this dire news is that for individuals who have cash in hand and the ability to qualify for mortgages, there will be incredible buying opportunities in real estate markets across the U.S.
In my estimation, the “sweet spot” for home buying will probably occur in the next 12 to 24 months, most likely around 18 months.
I’m basing this guess on norms from past recessions and the fact that home prices drop during the winter months, typically hitting lows from November to February. In most markets, winter home prices drop 10-20% from their maximum prices in the same year.
If you’re interested to play this market cycle, then I would suggest that you follow your zip codes of interest on your preferred real estate app, such as Zillow or Redfin.
Specifically, you’ll want to notice the rate at which home prices are dropping on a month-over-month basis. I’d also pay close attention to the “days on market” metric for each property, because this is a good indicator of supply versus demand.
Use this data to track price changes within your target real estate market. Be patient, wait for real estate prices to drop, and then act swiftly to pick up a property (or properties) at a substantial discount. As mentioned, you’ll want to mark winter 2021 as a potential “time to buy.”
When the market rebounds post-Coronavirus, you just may make the the biggest financial score of your life.
What questions do you have about real estate during the Coronavirus? Ask them in the comments below.