Ask Brian: What Does the Economic Crash Mean to Real Estate Investors?



Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

mortgage defaults

Question from Lucy from Illinois: Hi Brian, I’m a long time residential real estate investor (27 years). To me, it’s obvious that the economy is heading for a major wreck. I have to believe that I’m like many other investors trying to sort out the implications to the real estate market in particular. Fortunately for me, I’ve stayed away from the stock markets. I have cash to invest and will probably at least consider borrowing more money at today’s super-low interest rates. But what the heck is a good investment move in today’s market?  

Answer: Hi Lucy. Change is always happening but what is occurring right now is unprecedented in one way but not completely. The speed that the change is happening is unprecedented. What’s not unprecedented is that the residential real estate market is shifting from a sellers’ market to an investors’ market. Unfortunately, it is likely to skip the retail buyers’ market.

But there are a lot of variables that will have to play out further. Within a couple of months, there will be a wave of mortgages payments becoming delinquent. One of the big variables will be how the federal government responds long term to these delinquencies. Currently, there is a moratorium on evictions but these can’t go on forever. For investors looking to buy properties, the mortgage delinquencies will create opportunities even if it appears these investors are vultures. There are two ways of looking at these opportunities; one is that early investors will swoop in like vultures. The other way to look at it is that these investors are helping people get out of untenable financial situations if they have no hope of making up the delinquent mortgage payments. Remember, many buyers bought on the upper edge when affordability was stretched to the limits. Continued affordability is going to become a big issue.

Something we do know is that this stock market crash has again wiped out the digital profits of Main Street investors. The dramatic drops in stock prices, along with the volume of trades being made, means a lot of money has come out of the stock markets. Much of the losses were digital losses but it also means a lot of cash traded hands. That cash will soon find new places to invest. The flight to bond markets has driven already low interest rates down to as near zero as they can get without going negative. One place that has always been a safe harbor for investment money is in real estate. There is almost certainly going to be a sea change in the real estate market. There just isn’t a way of knowing precisely what the change will be and how dramatic it will flow through different regions and locations. Now is not the time for investors with a low tolerance for risk to jump into the market but as time passes, the picture will become clearer and the right opportunities will emerge.

The unemployment picture looks very bleak for the coming months. Still, people need somewhere to live. With the outlook for mortgage delinquencies being bleak, it can be expected another significant surge in rentals is only a few months into the future. In general, an uptick in the rental market will be good for investors.

Other investors will be looking for bargains to buy and sell for a profit over the next several months. The biggest uncertainty is not knowing how low the market might go. It’s possible that by the end of this summer, the market will look very much the way it did a few months ago. Or the market might start on a downward slope and continue for many months or even a year or more. If you buy a bargain property two months from now, you might be able to sell it again for a decent profit eight months in the future or it might take much more time. With real estate, the cycles run long periods of time – often for years. One thing you can almost certainly be confident about is that real estate will not take the enormous one-day and one-week losses that Wall Street has demonstrated again and again.

For now, the prudent move is looking to take advantage of the lowest interest rates we will ever see in our lifetimes. In the coming months, there will probably be solid opportunities to buy during a declining market – but not without risk. What we do know is that the market always has three types of sellers:

  1. Sellers owing more on their mortgage than the market value of the house.
  2. Sellers with a mortgage closely equal to the market value.
  3. Sellers with solid equity in the house.

Lucy, again, this is likely to be a sea change. Timid investors are going to wait to see how this unfolds over many months. Aggressive investors will quickly start looking for sellers that have solid equity and can sell below the market high point but are having trouble making mortgage payments. Most investors will be between the two extremes. Fresh markets always develop, even for sellers with mortgages higher than market value or near market value. Early in this dramatic change, the best thing to do is to keep checking the pulse on what is happening and how the market segments are evolving.

Please comment about what you expect to change in the real estate market.

Photo by Obi Onyeador on Unsplash

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.

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