Owner of The Mandrell Company. Real estate investor, broker, coach, lecturer and author.
Real estate mogul and world-renowned shark Barbara Corcoran once said, “A funny thing happens in real estate. When it comes back, it comes back up like gangbusters.” There’s no doubt the real estate market is volatile right now, but there are ways to adjust your portfolio, regardless of the economic climate. Before we can discuss strategy, we need to explore real estate economics generally, the differences between a buyer’s market and a seller’s market, and how certain economic climates can affect lending practices.
A buyer’s market is one where there is more inventory available than there are buyers. The term comes from the buyer having the upper hand in this scenario. For example, there may be five homes available for sale for every one buyer who is looking to purchase in that particular market; therefore, the supply exceeds the demand. In a buyer’s market, prices tend to stabilize or decrease as sellers need to compete for buyers’ attention. As a buyer, you have less competition and can move on to the next deal if the first seller doesn’t want to play ball.
The opposite is true in a seller’s market, where there is more demand than supply. This means that you have more buyers looking for property than available inventory on the market. For example, if you have 10 buyers for every house that becomes available for sale, it will drive the price upward. In this scenario, buyers are now competing with one another for a limited supply of housing, and the sellers can hold the line on price and terms.
It’s important to understand that markets are local, and the state of each market is primarily determined by local factors. Not only do markets vary from state to state, but they can vary even within a city, where there may be several submarkets that differ from one another.
The Money Supply
When the economy is thriving and people are doing well, money is readily available and easy to come by. Unemployment is low; wages are up. People are shopping, and money is moving freely. During these good economic times, banks feel comfortable and tend to loosen lending restrictions. Required credit score goes down, and loan-to-value ratio goes up, while underwriting requirements get pushed to the side.
When the economy isn’t doing well, people lose their jobs, and the unemployment rate goes up. Businesses and consumers slow down on spending, and money doesn’t flow as steadily through the economy. Lenders are not as confident in the economic state and tighten up on lending guidelines. During tougher economic times, you’re likely to see higher credit score requirements, lower loan-to-value ratios and higher debt-to-income ratios. Depending on how bad the economic situation is, you may see foreclosure and eviction rates go up as people struggle to pay for their housing.
Again, keep in mind, real estate doesn’t work on a national scale. Real estate is a local business. You can have one city or state doing poorly, while another part of the country is thriving. When events like Covid-19 hit, they affect the country as a whole, but the recovery time will be different around the nation.
When the economy is doing well, money is easy to come by, but that doesn’t necessarily mean there are good buying opportunities. When times are good, money loosens up, and your deal funnel may shrink a bit. Marketing and lead generation tactics that you were able to use in a bad market may not get you many responses in a good market. In a bad economy, you may need to pitch your investment opportunity to five times as many lenders to find one that suits your needs. You have to work harder to find deals when times are good, and you have to work harder to find money when they’re bad.
Adjusting Your Portfolio
Despite the volatility of today’s market, here are five things for real estate investors to consider:
1. With interest rates at historic lows, is it time to refinance your existing loans?
2. With eviction moratoriums ending soon, will there be a flood of empty units in your market? Will this create greater competition for good tenants?
3. With many colleges operating at less-than-full capacity, are college rentals in trouble? Is it just short term?
4. With lenders tightening up, should you reevaluate your offer pricing and terms for potential sellers?
5. How quickly will the next recovery come, and what strategic moves can you make now to set yourself up for the future?
There are opportunities for real estate investors to make money in any economic climate. You just have to know where you are in the market and adjust your focus accordingly.
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