With the current focus on the coronavirus, it’s important for real estate investors to consider how this pandemic will affect investment in this sector. Stocks are tumbling and haven’t been this volatile since the Great Depression: but the outlook for residential real estate investing is excellent.
How the Coronavirus Affects Real Estate Investing
To understand the effects of COVID-19 on the real estate market, it’s critical to grasp why this virus is so serious and why confidence is the only thing keeping up the stock market.
The virus itself has a high R0 value (pronounced pronounced R-naught), meaning it is very contagious. The R0 value of a virus refers to how many people the average sufferer spreads their illness. For a virus to completely stop spreading, you need an R0 of 0. That means the infected have stopped infecting anyone else. The threshold of an epidemic is an R0 greater than 1, meaning each infected person is infecting at least one other. All strategies for public health are aimed at getting R0 down to below 1.
In the case of the coronavirus, R0 estimates are somewhere between 2 and 3, meaning that each sick person infects two to three more people. This rate of infection is very hard to contain and is the driver behind the extreme social distancing and lockdown measures being taken by authorities.
But the R0 isn’t the only problem with COVID-19. It also has an extremely high complication rate, and yet American seem more nonchalant about the spread than some other countries. Meanwhile, doctors in other countries are sounding the alarm about long-term lung damage being seen even in young patients without underlying conditions and many complications among diabetics and other vulnerable groups.
Stock Market Confidence
The American economy has financialized to the point that the economy is completely dependent on the stock market instead of the stock market functioning as a reflection of the economy. The economy may be very strong, but it relies on the stock market because of the vast number of 401k plans and the number of investors that entails. The Baby Boomer generation is currently in the process of removing their 401k investments, which they need for retirement.
With that and the current fears surrounding COVID-19, confidence in the market is at what is possibly an all-time low. The problem with this is the market is utterly dependent upon confidence. It only stays propped up so long as investors are confident. When that confidence wanes, the whole house of cards comes crashing down.
The History of Real Estate Performance
Traditionally, real estate investments have performed very well in times of stock market volatility. Debt becomes cheap, and if history is any guide, a look at the Great Recession just a decade ago shows that rents stayed relatively stable throughout the period.
A major reason for this is the simple basics of human existence: there are many things people are willing to give up or tighten their belts over when times get tough, but they always need housing. In fact, it might be correct to say that people value their housing more than ever in times of crisis. The home becomes the center of the universe and a perceived safe haven in the storm.
But that’s not the only reason to be optimistic about the housing investment market in particular.
The Work-At-Home Revolution
The work-at-home revolution has been underway for some time already, with Millennial workers increasingly prioritizing this as a perk when job hunting. This revolution has been slowly trickling along, but COVID-19 has just caused the dam to break, turning the trickle into a torrent. Companies that wouldn’t even consider work-at-home options two months ago are having to scramble to make it happen. Even teachers, doctors, and counselors are getting in on the act.
All around the world, people are being forced to stay in their homes. Children are being required to study from home. The home has become the center of the universe and the only place of safety in the perception of many consumers. How is this affecting the real estate market?
Single-Family Homes More Valuable Than Ever
With everyone confined to the home, the value of the home has never been higher. Single-family rental properties, in particular, are a great investment option, not only because people always need housing, but because of social distancing and the need for families to be able to spread out a bit when everyone is locked inside together for extended periods.
Rental Demand Will Rise
Consider the following example: Two roommates rent a two-bedroom house. They each work for a separate employer, and until recently that was fine. Now both are being ordered to work from home. One roommate now needs two rooms so they can build a home office, and the other roommate has to move out. Remote work requirements and the work-from-home revolution have just doubled the demand for residential housing.
Residential Real Estate will Outperform Commercial
People are avoiding both the office and retail locations, and this is going to mean a harder hit for these sectors even as residential real estate does well. Not only is the work-at-home revolution having an effect at the moment, but it’s likely to have a long-term effect that can only work in favor of the residential real estate investor and against commercial investments. As employers streamline their work-from-home process and figure out how to effectively manage employees remotely and keep up good communication, the benefits of remote work for the employer will only become more clear.
Consider what could happen as company costs go down because overhead is lowered. Without rent to pay or high utility bills to cover electricity and internet use, employers start saving money while still getting work done. They no longer have to provide coffee and cubicles and a break room. If people aren’t all in the office together, there’s no need to worry about politics, political correctness, sexual harassment, or any of the other problems that require training and expense to avoid liability. It’s not possible for anyone to slip and fall in the office if no one is in the office building. The result could very well be a long-term increase in demand for residential housing coupled with a long-term decrease in demand for office space.
Other Reasons to Invest
There are some other good reasons to put your investments in residential real estate. For one thing, money is ultra-cheap right now, with very low mortgage rates. For another, the inevitable response to the COVID-19 crisis will be the Fed printing a lot more money. This always leads to inflation, which has a more serious negative effect on other forms of investment. But that inflation will also make those cheap mortgages even better.
Finally, Chinese investors aren’t going to be as able to prop up the cyclical markets as they have in the past. They can’t come to the US at all right now, and probably not for quite a while, and all indications out of China suggest that their manufacturing is way down and their economy suffering, meaning their investors won’t have the same amount of money to throw around as they have in recent years.
Is It Time?
There’s never been a better time to invest in residential real estate. For more information on how the coronavirus is affecting real estate investing and to discover the secrets of creating long-term wealth through property investment, listen to Jason’s 2-part interview with George Gammon on Episode 1408 and Episode 1409 of The Creating Wealth Show and subscribe in your favorite podcast app.