If you’re like most investors, you’ve been following the news about coronavirus, and the stock market, with a knowledge that if things don’t improve soon, the economy is headed into an economic recession.
The big question though is how will an economic recession affect the real estate market? In this article, we will answer this question just so you will know what to expect in the coming months.
How Will The Recession Affect Multifamily?
Is the real estate market recession-proof? The answer to this question is no.
Even though mortgage interest rates were cut by a half-point recently, the reality about coronavirus and it’s affects on the real estate market is that real estate is not immune from major disasters like COVID-19 or the collapse of Lehman Brothers and Bear Stearns in 2008.
Even though the circumstances of the next recession are different than the 2008 recession, the reality is that as long as people are not working, and real estate is not considered to be an “essential service” in most states, the real estate market is at a standstill until the pandemic is declared to be over.
What Could The Multifamily Market Look Like In The Coming Months?
Banks could get more conservative – Although it’s been fairly easy for most investors to get financing in recent years, one common thing that may happen after the start of the next recession is we could see some banks become more conservative.
I say “could see” because what happens in the next 30-90 days is all dependent on what affect the economic stimulus has on the economy, and if the President actively encourages banks to loose heir standards and lend even though most banks naturally want to become more conservative.
Some banks are already starting to tighten their belts, especially with HUD loans, that are now requiring borrowers to have minimum credit scores in the 600 range instead of just 580 before.
Real estate investment activity may slow down as a whole – Even though most investors jumped on low-interest rates following the Fed’s recent rate cut, the reality is that investor activity as a whole may slow down or come to a halt very soon. Why? Some investors will scale back on their investment plans for the next six months, to one year, especially if they think that the real estate market is going to get worse before it starts to improve.
Construction will slow down – If you remember what happened after the 2008 financial crisis you know that construction ground to a halt following 2008 and this has severely affected the real estate market, especially in California.
Sadly, the same could happen in 2020, especially if the banks become more conservative and make it difficult for construction companies to get loans for their projects.
Renters wages will drop in some markets – Although rental properties will always be in demand regardless of what’s happening in the real estate market, wages for some renters may drop in some markets.
This is to be expected since many industries and businesses are shut down or have already gone out of business. If those companies which have shutdown during coronavirus don’t re-open, the people who were employed by those companies will have to find new jobs and they may have to accept positions for less money with new companies.
There may an uptick in vacancies – Another consequence of an economic recession is that we could see an increase in vacancies nationwide as those renters who lost their jobs due to coronavirus are unable to pay their monthly rent.
Since the Federal Government has stepped up with the economic stimulus, it’s likely that mass vacancies like we saw following the 2008 financial crisis won’t happen because the Fed may step in to stop those vacancies from occurring with more helicopter money or other measures to help landlords and tenants.
More former homeowners could start renting – With the wave of mortgage defaults that we saw following the 2008 financial crisis, we also saw a wave of former homeowners renting. This could happen in 2020-2021 but it’s going to be different than post-2008 because renting is more accepted by older individuals than ever before so even if we see more people renting following short sales or foreclosures, it’s going to be common now for people in their 50’s, 60’s and 70’s to rent instead of buy.
How to Take Advantage of Opportunity During the Next Downturn
Recessions are not fun but the good news is that as an investor you can take advantage of what’s happening during the recession especially if you see the following occur.
Declining property values – Following the 2008 financial crisis, we saw property values drop, especially in Class A multifamily properties because many people who were renting Class A renters were unable to continue paying their leases and ultimately transitioned to Class B properties.
Since this is likely to occur again, we could see more Class A multifamily properties come to market because those properties income streams are supported by leases so it’s important to be watching for more Class A multifamily properties to come to market in the coming months.
It’s possible that we could see some Class B multifamily properties come to the market in areas that have been hard hit by coronavirus like Southern California but again we’re still in the early stages of the next recession so this is something that you should be consistently watching for over the next 60-120 days.
Even lower mortgage interest rates –While President Trump is still in the White House it’s also possible that we could see mortgage interest rates lowered by another half-point or more to simulate the real estate market.
Could we see mortgage interest rates drop to zero? Many economists and mortgage industry professionals feel that zero percent mortgage interest rates aren’t going to happen but what happens in the next 90 days could change that.
Some markets may take longer to recover than others – The recession that followed the 2008 financial crisis was bad since every real estate market was hit at the same time but prices didn’t recover at the same pace nationwide.
For example, home prices in Los Angeles and Orange County recovered quickly after the last recession while other towns in California like Stockton and Modesto recovered more slowly. The same is likely to happen after the next recession so you should choose carefully the next cities that you invest in because unless it’s a top tier market, the economy where you’re investing may take longer to recover than others.
Some of the other real estate markets to be watching during the next recession include Las Vegas, Orlando, Boise, Salt Lake City, and Denver.
Any city that relies heavily on tourism, travel, manufacturing or hospitality could be a great place to invest in multifamily properties after the next recession.
Choose asset classes carefully – Even though you may be ready to buy a Class A multifamily property during the next recession, it may be a better strategy to invest in Class B properties first then invest in Class A Properties as the next recession is winding down.
Recessions always mean opportunity for investors and we’ve offered you several great tips that will help you to profit from the coming recession.
Always remember to do your due diligence during the next recession because taking the time to analyze a multifamily investment property, recession or not, is going to save you the hassle of investing in the wrong property.