What to do When the Pandemic Market Goes Crazy

By Charles Sells

December 2020 started off with a bang in California. Despite being one of the most locked-down states in the country, the Golden State marked the end of this crazy year with a crazy new high for median sales prices, posting a metric of $712,430. This number has been climbing since June, when the state posted a then-high median sales price of $626,200 and then beat that number by more than $70,000 in August of 2020.

Local real estate agents are calling the West Coast market a “perfect storm” in the middle of an otherwise dire year for, well, just about everything. They cite low interest rates, the existing housing shortage in the state, and heightened demand for property in a state known for its “perfect” climate, year-round sunshine, and massive opportunities for outdoor recreation. As one Sacramento appraiser told the New York Times at the start of the month, “A lot of people think the pandemic equals ‘the market is suffering,’ but that’s just not the case.” He went on to note that the much-touted California exodus to more affordable states like Texas, Nevada, and Arizona does exist, but called the loss of roughly 650,000 residents in 2019 “a drop in the bucket” compared to the 39 million still on location.

Another appraiser, Jonathan Miller of Miller Samuel, added his two cents on the topic of inventory shortages. He said the real impetus behind California’s housing-price surge is simple: Builders in the state are not building residences that buyers can afford. “We aren’t building enough affordable new homes,” Miller said. “When it comes to inventory, there is more lost in affordable and modest-priced housing, year-over-year, than in the upper-level housing market.” He went on to call California a “proxy for what we’re seeing nationally,” and that observation is one of the best pieces of guidance for real estate investors in the ongoing pandemic economy to date.

The Obvious ‘Action’ is on the Higher End

When the national economy shut down last March as the United States attempted to rein in an unknown viral threat called the novel coronavirus COVID-19 (known today simply as COVID to most people), states reacted very differently depending on their state policy tendencies. California shut down hard, imposing curfews, mask mandates, and stay-at-home orders that kept residents indoors and pummeled the state economy. In fact, many of these policies remain in place to this day and are even stricter as the state’s governor, Gavin Newsom, attempts to prevent a post-holiday spike in infections.

The result of these strict orders was that real estate “action” had to take place mainly on the higher tiers of the market. At a minimum, builders seemed willing to accommodate the preferences of buyers capable of acquiring condos priced above $500,000, for example. In single-family homes, most buying activity is, of necessity, above the $600,000 mark simply because these are the buyers who are able to demonstrate employment and income in 2020 that will enable them to enjoy the low interest rates available to them.

Lower-wage earners, renters, and first-time buyers looking for more modest options will be hard pressed to find anything and, in many cases, are too hard-pressed to find work. California’s unemployment rate remained stuck in the double digits until October of this year, and many analysts say that number will likely rise in the wake of new curfews, pandemic-induced work stoppages, and business restrictions. Jeffrey Clemens, an economics professor at the University of California San Diego, warned that California’s “great” numbers (9.3 percent unemployment compared to the national average of 6.9 percent) are unlikely to last. “The odds of seeing continued strong employment growth seem low,” he said, warning that the November numbers were released prior to the governor’s latest round of coronavirus containment measures.

By comparison, states with more restrained anti-COVID public policies are performing well above the national average, with unemployment rates as low as 3.5 percent (Nebraska). In the southeastern United States, which was already emerging as an affordable haven for the movie and television production industries prior to the pandemic, unemployment rates ranged from 4.2 percent (South Carolina) and 4.5 percent (Georgia) to just under the national average (6.3 percent in North Carolina). At the time of this writing in early December 2020, California’s infection rates were not markedly lower than these states despite much more stringent regulations on work, public and private gatherings, and travel and, indeed, were significantly higher according to CDC numbers.

Make Your Move in the Market Tier that Needs You

For real estate investors struggling to find predictability in the housing market in 2020, the best move will be to focus where there are problems to be solved. For most investors, this will mean holding firm in the familiar territories of single-family rentals (SFR) and fix-and-flip deals on the affordable end of the spectrum. For the purposes of this article, define “affordable” as “accessible to a worker earning the median income for an area.” These buyers are eager to take advantage of low interest rates when they can access financing to purchase properties and are willing and, more importantly, able to rent properties in desirable areas even if they cannot buy them.

What defines “desirable” in 2020? According to Kiplinger, Remodeling Magazine, and the National Association of Home Builders (NAHB), desirable properties in 2020 boast a modern laundry room, energy efficiencies like Energy-Star qualified windows and appliances, plenty of outdoor living space and updated patio areas, walk-in closets and pantries. According to data from Realtor.com, location is, as always, also key. Access to nature and the outdoors figures much more prominently in buyers’ decisions these days than, say, commute time. In fact, 38 percent of buyers in a Realtor.com survey said they are looking at “higher-priced homes” with more square footage, and 36 percent said they were willing to commute longer or live farther from work.

For real estate investors, this news is extremely positive because it creates options for creativity when it comes to locating good deals and acquiring properties when most of the country’s housing inventory is extremely tight and competition is fierce. Most real estate investors like to say they are in “the business of solving problems,” and the ongoing housing affordability crisis in the United States during this pandemic is creating an enormous problem for many would-be buyers, who might benefit from flexible financing or rent-to-own offerings, and renters, who are often willing to pay premium rates for attractive locations but find their options sparse to nonexistent.

Working with an established investment firm to find potential deals and acquire properties even in highly competitive markets is a great way for investors to “break into” hot markets and identify opportunities that might be hidden to an individual investor but clearly visible and accessible to a firm or cooperative investment company. Whether you are new to real estate investing or just optimizing your current strategy for these strange times, there is plenty of opportunity in the market and no reason to shut down your portfolio in 2020.

Charles Sells is the founder and CEO of South Carolina-based boutique investment firm Platinum Investment Properties (PIP) Group. He has been investing in the southeast and in other attractive markets around the country for more than two decades. Get more market insights and trend updates or request a free consultation at PIPGroup.com.

 

About the Author

Charles Sells is the founder and CEO of The PIP Group, a turnkey service provider that focuses on investments in distressed real estate assets including tax liens, tax deeds, traditional foreclosures, fix-and-flips and long-term cash flow acquisitions. He has been involved in tax lien investing for over 20 years, during which time The PIP Group has grown to become one of the largest agencies of its kind with nearly 1,000 individual and institutional investors worldwide.

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