Coronavirus Impact on the SFR Market
We are living through a chaotic and uncertain time. We've been relatively fortunate thus far that the number of cases in Texas has remained low. Regardless of the local illness levels, it seems likely that the impact on the global and American economy will be significant, likely pushing us in to a recession.
What does all of that mean for your single family rental home investment, now and in the future?
While every recession is different, we can look to the 2008-09 Great Recession for some indicators of what might happen.
- Domestic migration could increase. We have seen very low levels of movement from state to state in the last 10 years relative to the previous 50. As unemployment levels increase, people will be more motivated to pick up and move to the parts of the country where jobs are less scarce. This contributed to the population increases seen across all 4 major Texas metros in the aftermath of the Great Recession.
- Fewer people could be buying homes. After the GR, due to tightened lending standards, fewer people could qualify to purchase a home. They still desired the benefits and lifestyle offered by a single family home, so ended up significantly increase demand for rental properties.
- Monetary policy significantly lowers borrowing costs. The much-reported Fed Funds rate, which dropped to levels near zero, does not directly impact mortgage rates. 10 Year Treasury bill yields correlate to mortgage rates much more so than the Fed Funds rate. Yield on those bonds goes down as prices go up. Bond prices go up when stock prices go down. Yields also go down when The Fed commits to buying significant amounts of mortgage backed securities, as they have indicated that they will. Low mortgage rates offer great opportunities to refinance existing debt or add to your portfolio and lock in low financing costs.
- Uncertainty creates Fear. Historically, great fortunes are made by those that are willing to be bold & take risks. Investing in rental real estate is never a short-term activity. Will the current unrest fundamentally change the demand for rental housing in attractive markets with low unemployment rates? If you believe the answer to that is no, then use the broad fear to be a contrarian buyer.
Is everything rosy? Absolutely not. There's definitely risk for Landlords today, and that risk will likely continue for the next weeks or months. Those risks, in our opinion, are:
- Increase in delinquencies. Many service sector workers are already feeling the impact of decreased earnings. Those workers are likely to be renters and will have trouble making April rent.
- Decreased willingness to visit occupied homes. Showing a home that is currently occupied by an owner or departing tenant will becoming increasingly difficult. Tech-forward companies like Darwin will leverage the ability to allow self-showings at vacant properties. The time to sell or lease a home will likely increase, at least temporarily.
We will continue to share our thoughts and insights as this situation evolves. Stay safe and feel free to contact any of the Darwin team to discuss investment strategies in more detail.