Real estate investment during recessions is a potentially attractive way to take advantage of low prices on a traditionally strong asset class. However, investing in real estate has risks that can be hard to predict over the course of economic cycles, and coronavirus uncertainty makes that forecasting even more difficult. In this article we will discuss what you should take into account when planning for investing in real estate in the coronavirus downturn.
The Upside of a Downturn
Recessions mean job losses and freezes on pay increases, so people have less money to spend on a new house. In recessions, almost all investment assets also tend to become cheaper, including real estate, reducing the value of people’s savings and wealth. That can make it more difficult for individuals to apply for a mortgage, and banks will be more cautious to lend money out as well. All of this adds up to lower demand for home purchases and increases inventory, which then puts downward pressure on pricing. But recessions create buying opportunities for real estate because you can get better prices on quality buildings that would normally be too expensive to be a good investment, and because recession conditions are temporary you can expect that the price of the investment will increase again.
Are You Ready for It?
Recessions, however, also have an impact on your own finances. It is important to keep in mind that while recessions are buying opportunities, they will also put additional pressure on you. Any other investments you have are lower in value, so they are less useful as collateral or for liquidity if you need cash. You are at a higher risk of job loss during a recession, which can suddenly upend your financial stability. At the same time, buying real estate means you are making a major, non-liquid investment that you won’t be able to easily exit. It might take a decade or more for a house to make a profit for you depending on market conditions, which are hard to predict. Tying up a lot of money for a long time is a risky choice during a recession, so keep in mind that the same forces that are creating a good buying opportunity also increase your risk.
Key Recession Indicators
The particular type of recession makes a big difference to the investment picture. For example, the 2008 financial crisis was particularly hard on the housing market because it originated in mortgage-based investment packages traded between banks. Meaning when those packages fell apart, the worst of the meltdown occurred in housing prices and mortgage rates, which took nearly a decade to recover in some markets. On the other hand, the coronavirus recession started out as a public health problem, and a potential economic crisis is a symptom. This means it is unlikely to have the same type of impact on real estate prices as 2008. Housing prices probably will not drop as low as they did after 2008 and it will not be as hard to get a mortgage or a refinance plan as it was then. The coronavirus crisis is a once in a lifetime event but the impact of is highly regional. Every state is taking its own approach to shutdowns, government spending, regulations, and other policies that affect how long their recovery will take. These policies will be very different for urban as opposed to less densely populated areas That all means the impact of coronavirus on real estate is likely to look very different in different parts of the United States.
Where will Real Estate Grow?
The long-term effects of coronavirus are still undetermined, but from a real estate perspective it may lead to increased demand for housing outside cities. The most dramatic and impactful stories from coronavirus have all come from big cities like New York, Washington DC, and California, the population density epicenters of the US. While this particular virus is new, the risk of another public health emergency due to a pandemic is ever-present due to globalization and international travel. Many people who live in densely populated cities may decide to reduce their risk by moving out to the suburbs or rural areas where density and travel are lower. Real estate markets that would fit this trend would be Ohio, Kansas, New Mexico and Arizona.
Whether it is the coronavirus or another cause, the economy cycles from boom to bust, and it’s important to understand what that means for real estate. When it comes to mortgage rates, they typically fall during a recession, but they do tend to come with more restrictions. As of the writing of this article you can refinance for as low as 3.25%, even with good credit this is likely at least 1% lower than what you currently have. This could save you several hundreds of dollars a month in the short term and tens of thousands in the long term. If you own property in a market where home values are still strong, now may be the time to leverage the equity you have accrued to use it as a down payment on a rental property. To hedge your bets on this you can buy in a strong undersupplied area like the Arizona real estate market, or you can be a bit of a risk taker and look at potentially emerging markets that were mentioned above.
As mentioned before, the number of renters tend to increase in times of an economic downturn. So if you are looking to purchase a single family home who should you rent to to maximize your return? The safest route to take is to find, well, a single family with good credit and solid provable income. But another route you can go is take that home and add a room or two and rent out each room. Where a single family could cover your mortgage with a little bit of profit, four individual renters could potentially double what you could get in rental income. Is it riskier? Yes. Individual renters go through life changes and oftentimes are not seeking a long term residence. But if you price it right, half occupancy can cover your costs.
When recessions hit, it is an opportunity to generate additional income and overall wealth. The real question is are you ready for it?