In 2020, real estate investors enjoyed the combined advantages of low mortgage rates and soft property prices. However, as the U.S. emerges from the pandemic and its economy recovers, there is a lot of pent-up demand for property and a lack of listings. And rising prices cut into potential profits for investors.
It’s a seller’s market, and that’s not likely to change any time soon. Homebuilders have been very conservative with their starts in the years following the subprime mortgage implosion when they were burned by huge inventories and falling prices. And now they are constrained by supply chain bottlenecks and soaring prices for building materials.
Today, even if every builder broke ground at 100% capacity, there would still be a home shortage a year from now, according to Barron’s.
Property Markets: Forces In Play
There are several factors that will probably influence the supply and pricing of property in the U.S.:
- Research from Real Estate Witch shows that 90% of those who planned to sell last year put off the transaction, and 22% decided to take their property off the market altogether. That means less inventory and higher prices.
- National foreclosure and eviction moratoriums are set to expire on June 30, 2021. Currently, 2.57 million homeowners are in forbearance programs with their lenders, according to Black Knight. Those homeowners may ultimately sell to find a more affordable living situation, but not right now. And in most cases, the homeowners and tenants will be responsible for making up their past-due amounts or leave. According to Clever’s research, most people surveyed are still living paycheck to paycheck and have no emergency savings, let alone money to make up past-due rent or mortgage payments. Landlords looking at surging prices may well be induced to sell their underperforming rentals. And mortgage lenders will have REO to unload in foreclosure sales. That means more inventory this summer.
- Although the financial position of 35% of Americans improved during the pandemic, four in ten have no emergency savings, six in ten report living paycheck-to-paycheck and one in four missed at least one rent or mortgage payment because of COVID. They are in no position to qualify for a mortgage at this time. And that probably explains why 61% of renters reported that they planned to buy a home in 2021, but now the majority say they are holding off. That should reduce the amount of competition for entry-level homes, the type favored by many investors.
- Even though only 10% of those who planned to sell last year went ahead as planned, three-quarters of those who did not sell their homes plan to list them later this year — primarily in the months of May, June, and September. That should take some of the pressure off of buyers in the second half of 2021 and early 2022.
- Despite the difficulty of competing for homes, most respondents (69%) stated that they believe 2021 is a good time to buy a home. In fact, 17% of renters accelerated their plans to buy. This attitude will likely encourage buyers to persist in the face of higher prices, which won’t bring them down any time soon.
How these conflicting conditions will ultimately play out is anyone’s guess. It does appear, however, that real estate inventory in much of the country will improve by the end of the year — but that may be only enough to slow the price increases. It won’t turn a seller’s market into a buyer’s market, and it probably won’t cause home prices to fall — only rise more slowly.
Silver Lining for Real Estate Investors
It’s a common saying in real estate investing that you don’t make your profit when you sell; you make it when you buy. And the low inventory is pushing prices higher and squeezing investor profits.
But it’s not all bad news. First, investors who already own property may be seeing nice gains. This may be a good time to sell and take capital gains or complete a tax-deferred exchange into new property.
According to ManageCasa’s 2021 US Rental Property Market Outlook, there are two rental markets in the U.S. — older apartment buildings in cities, which are seeing declining rents and occupancy rates, and newer buildings and homes in the suburbs, where vacancy rates are tiny and rents are climbing.
There may be opportunities to buy in depressed urban communities, knowing that millennials will eventually make their way back into the cities they prefer. Or you may prefer to buy rentals where demand is high and rents are rising. That’s a safer choice even though the upside is lower.
2022: Fannie Mae and Freddie Mac Predict Slowdown
If 2021 looks grim for bargain hunters, 2022 may bring improvements. Both Fannie Mae and Freddie Mac predict slowdowns in housing markets as mortgage rates rise. Increasing interest rates make homes less affordable and shrinks the pool of potential buyers.
Understand that the mortgage clearinghouses are not predicting a decline in prices, only a slowing of increases. According to Fannie Mae, home prices that were originally predicted to rise by 4.2% are now expected to climb by 8% in 2021. But expectations for 2022 have been adjusted downward, decelerating to 2.9% as measured by the FHFA Home Price Index.
Freddie Mac’s predictions are a little rosier — its analysts predict home prices will rise by 6.6% in 2021 before slowing to 4.4% in 2022.
Finding Investment Opportunities
There will be homes for sale for those in position to snap them up:
- Foreclosure sales and REO will hit the market once the moratoriums expire.
- Renters are largely holding back with the majority unable to buy at this time.
- Rising mortgage rates will curtail affordability for those who must borrow to buy.
- Builders are adding inventory as quickly as they can.
- Rentals in temporarily depressed areas may provide great investment opportunities.
- Cash buyers will continue to hold an advantage.
The coronavirus changed everything in U.S. real estate, but the impact is not permanent. And in one way, nothing changed — there will always be good investments to those who search patiently and with diligence.