Lately we are noticing a swarm of people looking to start investing in Real Estate. I'm not sure if this is because people had too much time on their hands and this pandemic finally gave them the time to look into it, or maybe it was the sudden uncertainty of everyone's jobs and the stock market crashing who made them realize they should diversify their investments. Or maybe it’s as simple as seeing the latest ultra low inventory and super high demand that got them thinking it was the perfect time to dive in.
However in my opinion, I think this sharp rise in crazy demand is going to be short lived. I'm not sure how short but it's like they always say: what goes up, must always come down. This lack of inventory started out by people holding back on selling their homes, out of fear of strangers inside their house for showings or just out of general fear of the future. Then as time went on, the lack of inventory kept climbing up in high gear because when there aren’t enough options to buy something else, people don't sell. They stay put until they can find the perfect place. Which created a chain reaction of low supply everywhere, especially in the suburbs with more people leaving the big cities.
Now with more time passing by, even with the real estate market staying high, the more convinced I am that things will eventually spiral back down and inventory will creep back up. But this time in larger numbers and will include lower rent prices. This would be great news for investors with cash looking to buy cheap deals, and great news for tenants if they could finally have more affordable options at their disposal. However, not so great news for most new investors who aren’t ready to weather the storms.
Why do I think things will spiral down?
Well first of all, the government can't keep printing money forever, so let's think about what this will mean once it stops. Several businesses including big players (other than the obvious places who are thriving right now like Amazon, Walmart, Costco, Liquor stores, etc.) are struggling hard these days. Restaurants, retail stores, hotel chains and Airbnbs in big cities (side note: I think Airbnbs will take a harder hit because people will now be looking for professional cleaning and hotel chain reliability to bring a high virus-cleanliness standard), commercial offices, cinemas and overall brick and mortar businesses, even shopping malls and big box stores are going to go through a very hard time this year and most are already going through it. From January to June of this year, around 15 major retailers have filed for bankruptcy already. It just takes one major business to shut down to create a ripple effect for a lot of people, so imagine a whole bunch of businesses all at once.
For example, let's just think of the fact that people are working from home now: With more people working from home, we'll have more commercial buildings that will become vacant, which will lead to maintenance workers, window cleaners, security guards and property managers (just to name a few) who are likely to all lose their jobs. As well as the nearby businesses and restaurants that relied on that busy day time foot traffic, then bus drivers and taxi drivers will get laid off, the gas, oil and automobile industry will be affected and the list goes on and on and on.
Isn't that the definition of a Recession?
Soon, there won't be enough jobs for the number of people seeking work which will lead to mortgage defaults and bring multiple foreclosures to the market. Then rent defaults that will lead to evictions causing Landlords to reduce their rents or giving up and selling their properties. This will create a bigger supply and a lot less people who can afford bigger rents or mortgages which will automatically affect the prices and values. A lot of new investors will be pushed to sell due to buying during an expensive market, or from being over leveraged (values possibly dropping below their loans) and then they'll start losing money every month (thanks to new low rents), turning an investment into a liability. I would encourage everyone to read The Secrets of the Canadian Real Estate Cycle by Don R. Campbell. Even if you're not Canadian, this book gives great insight on the signs to watch out for as a strategic investor.
Other articles to read from the pros at Bigger Pockets: https://www.biggerpockets.com/blog/delinquent-loans-drag-commercial-sector-ruin)
Is Building New Safer? No. Right now I'm seeing new investor's swarming to build new. People are constantly checking in with me to get my opinion and I feel awful for saying this, but I truly think this is probably the worst time to start our kind of business. The cost to build is way more today than it was for us when we started a few years ago. The pricing in materials keep increasing like crazy with the borders in a constant feud and the supply chains all screwed up, and the fact that no one is selling their homes and are instead doing big projects in their backyards, really revved up the demand at the lumber yards like no other year before. A pressure treated 2x4 has more value than gold now a days...
I think people are swarming to build new because of the lack of inventory and high prices, they figure they might as well build instead of settling for what ever is left on the market. The issue here is that if you're building as a long term investor during high cost times and economic uncertainties, you risk being stuck with an expensive build cost and having to support that during the low rent period that might be coming up. New builds usually warrant a more expensive rent cost but if people can't afford that cost anymore you'll have to lower your rate and might end with a monthly loss.
The only reason we are still building this year is because we had already purchased 2 vacant lots before the pandemic hit and we figured we might as well monetize them asap. But even for us with a more established portfolio, we are wondering if this strategy might be becoming a bigger risk. It could be just a matter of time before Supply and Demand flips the other way. For now, we are focusing on knocking out these 2 constructions as soon as possible, then we might take a step back and depending on the outcome we'll we might re-strategize.
The only part I’m not sure about is how bad this is going to be on a national scale. I think some areas like the big cities will obviously be more affected than the suburbs, but I think that with big employers who risk shutting down everywhere, the effects will ripple into the suburbs as well. Overall, I still believe we might be going into a recession, but some areas might just be less affected than others.
Obviously I hope I'm 100% wrong and that life will pick back up and go on as normal... but why do I seriously doubt there won't be any major side affects to the housing market with all of this?
"Hope for the best but prepare for the worst"