What Economic Uncertainty Means For Real Estate Investors
Against the backdrop of the coronavirus pandemic, the international financial markets have been consistently experiencing turbulent times amid the various challenges of containment as well as the threat to international economic growth. In the U.S., long-term interest rates have plummeted to lows never seen in the past as concerns regarding the economic and financial impacts of the outbreak mount.
What does this mean for you as a real estate investor? While the full effects of this crisis remain to be seen, it is now evident that the virus has the potential to cause considerable disruption to businesses.
Low Interest Rates
Favorable interest rates tend to make commercial and residential real estate financing more affordable, and this is great news for investors. When investors begin thinking that the stock market is volatile or too risky — like they are right now — investors tend to sell their stocks and start buying bonds. The increased demand for bonds drives their price up.
In other words, mass sell-offs in the stock market generate loads of cash proceeds that need to be invested. And the higher the bond prices, the lower the interest payment. This is also called the yield, and it is often relative to the price. Mortgage rates are lower when bond yields are lower. If you are a house flipper, you can benefit a lot from low interest rates as they make homes more affordable.
The low interest rates present an opportunity for you if you are an investor. You can, for example, adjust your real estate portfolios in an attempt to boost returns and protect yourself against risk. The reason is simple: The level of interest rates in an economy affects the way certain investments, such as stocks, bonds and real estate, perform.
Low interest rates in the country also mean that it is a great time to refinance if you are a real estate investor, because you can benefit from lower rates.
More Buying, Especially From Foreign Buyers
Investors are seeking calm and stability in the current storm. Residential real estate in the U.S. appears to offer that calm, especially single-family rental homes. Foreign investors are stimulating buying activity in the U.S. For example, in the recent past, China’s foreign investment in U.S. real estate took a nosedive. But because confidence in the Chinese real estate market and other foreign markets is starting to falter, many investors are quickly moving their funds into hard assets, such as real estate, in stable areas such as the U.S.
The rental property market in the U.S. is piquing the interest of many foreign investors right now, and they are piling into rental property So, if you have an underperforming real estate investment, now is a great time to offload that investment and make some money.
The interesting thing is that many of these investors are not even visiting the U.S. in order to tour these homes themselves. Instead, they are buying houses online. From the demand perspective, key economic indicators suggest there will be plenty of homebuyers in the market.
Reduced Access To Materials
According to the National Association of Home Builders, almost one-third of the total home building material inputs in the U.S. are imported from China. It is worth noting that this does not include finished products, such as bathtubs, appliances, sinks and a lot more. When you consider these facts and factor in container cancellations, it can create a significant lag in product delivery.
Keep in mind that since the 2008 financial crisis, home construction has really struggled to keep pace with increasing demand due to various factors, such as lack of available land, the cost of construction and the shortage of construction labor.
However, the good news is that homebuilder confidence had recently increased considerably. This indicates that homebuilders are inclined to begin construction on homes. However, new home sales are largely dependent on the number of homes that are built. This raises concerns and challenges on the supply side.
The U.S. housing market had already been in the middle of an extreme shortage of homes for sale, so this spike in demand just increases the competition. As an investor, low inventory means that you are well positioned to get multiple offers on your property, so you may want to take advantage of this new demand.
The coronavirus is certainly a wild card in the U.S. housing market. While we are in unchartered territory right now, I advise investors in the U.S. real estate sector to try to be as prepared and ready as possible for any further disruptions by verifying the terms and conditions of contracts as well as lease agreements. These may be impacted considerably by closures or delays.
If the impact of the coronavirus triggers even a minor recession, it may put a damper on home demand. However, this would actually be welcome for potential buyers, especially in competitive markets. Still, you should not expect home prices in the U.S. to drop. It is likely to just slow down the speed at which the prices are increasing.