Last week the federal government outlaid another $1,400 stimulus checks to 90 million Americans. This first wave of checks and direct deposits is part of $242 billion in stimulus to help the economy persist through the trials of the pandemic. The question emerges, with all of this additional money in the hands of consumers, how is this going to impact the real estate market?
It’s important to note that after the last stimulus rounds, the Federal Reserve Bank of New York conducted a study and found that about ⅓ of the payments were saved, about ⅓ were used to pay down debt, and the other ⅓ was spent. That means that American consumers are decreasing their debt and increasing their savings, therefore bettering their stances to have cash on hand to make large purchases like home purchases or other real estate investments.
How it is Affecting Residential Real Estate
This is apparent in what is happening with home sales all across the country. Supply is at all-time lows at roughly 2-3 months of supply across the country. The number of homes sold has declined while demand for homes is persisting. Most would-be sellers are holding off on selling because they fear they won’t have any place to go because of work travel restrictions and lack of inventory for them to purchase a new house. I have heard cases of realtors calling past clients who just bought several months prior, pleading with them to sell because they are sitting on close to one hundred thousand dollars of appreciation yet they won’t sell because they have little to no options to put that money back into another home that they would be happy with. Plus they have only just got settled in the house!
What’s more, is the wave is not expected to stop. Until vaccines are more widely distributed and consumer sentiment rises, homeowners will continue to hold on to their properties rather than sell. And despite the interest rates ticking up the past 3 months, especially in the last month, they are still low enough to increase the affordability for most buyers. The fact is, most buyers are more concerned with the monthly payments as a means to gauge affordability than the sales price. When rates are low, so are payments, and thus properties are more affordable to most buyers.
The Federal Reserve has indicated that they intended to keep interest rates low for the foreseeable future so as long as supply is limited with consistent demand and low-interest rates, expect the market to keep going up and prices to rise. This is true across the real estate sector, so waiting it out may hinder you more than help you if the drop you are waiting on doesn’t come. As long as you buy on sound financial principles and not the appreciation alone, and have cash flow then buying now with low, fixed interest rates still makes a lot of sense.
How it is Affecting Commercial Real Estate
Understand we live in a time that cash is king, and right now in the commercial real estate world cash flow is king. In the multifamily space, most landlords and operators are doing really well, benefiting from low-interest rates with refinancing opportunities and new purchases that are locked in at or near historical lows. And because of the government stimulus and the Emergency Rental Assistance Program landlords and operators are cash flowing well (in most instances outside of areas heavily affected by covid).
Because they are cash flowing and they know there is a high demand for their product, they have little reason to sell unless they get a Godfather “offer I can’t refuse” offer.
We are in a market where multifamily sellers are throwing out sale prices that sound good to them rather than what makes financial sense to buyers. Can you blame them? And brokers are taking those listings and putting them on the market because they know demand is strong, and with interest rates so low that big firms or institutions can park their money in these assets and still get returns that fit their business model. For the prudent owner-operator, those numbers wouldn’t make sense with there being little value to add.
We are in a market cycle where filling the top of your funnel (getting enough quality leads in) is the most important part of getting deals. Good deals aren’t as abundant, but they are out there! It just takes more willingness on your end to go out and find them. If you aren’t expanding the top of your funnel and finding ways to get more leads and only relying on agents and brokers, you are at a disadvantage. In the words of Jerry Rice, do what others won’t today so you can do what others can’t tomorrow.
Wrapping it Up
The market is hot and showing no signs of cooling. With interest rates still very low by historical standards and extremely low supply, it is hard to 1) find deals and 2) finds deals that make financial sense. But this is where the winners stick out. Avoid becoming one that blames their inability to find success on external circumstances and take action to fill your funnel. If you aren’t in a position to allocate more time to finding deals, then find a trusted operator who is and invest with them because it’s better to get your money working in a well performing asset than having it sit in this low-interest environment.
In the end, it’s a numbers game and whether you are focused on residential or commercial, your success is a function of how many deals you find, analyze and offer on. Fortune favors the bold.
Blake Dailey is a multifamily real estate investor and host of the Multifamily Journey Podcast. He has reached financial independence (Passive Income > Expenses) through investing in real estate and aims to help others do the same. He helps passive investors impact their lifestyle and wealth by investing in multifamily real estate. He helps investors achieve the ultimate asset – Time – by making their money work so they don’t have to.