For real estate, as for many things, 2020 was a strange year. Despite a pandemic, a recession and unemployment that at one time hit 20 million, 6 million homes were sold and the average home price was up 5 percent. There were record low mortgage rates of course, but there’s also the fact is that the recession has mainly been concentrated among people with lower-paid jobs – people who rent.
2021 will be a strange year too. With vaccines rolling out, we know the end of the pandemic is in sight, maybe by 2022? But that won’t mean any sort of return to normal, for the economy or for real estate. Here are a few things to consider.
1. Jobs: A lot of jobs are never coming back. Businesses have learned to work with fewer employees as the pandemic super-charged a trend already underway before the recession. Many of the lost jobs are in retail and at restaurants but high-paid computer engineers also are affected. Yes, the economy will eventually create other jobs, but that won’t help people in 2021.
2. Urban Migration: The movement to the big cities will continue. Even though the pandemic showed that many jobs can be done from anywhere, people and businesses still want to be near the infrastructure, the social activities, the access to premium healthcare.
3. Migration to More Affordable Housing: People will move where the jobs are, and away from expensive housing. For decades, young people moved from the Northeast to Texas and Florida. Recently they’ve been leaving California. With a lot of unemployment, a lot of people will be on the move.
These observations lead me to the following conclusions about real estate in 2021 and beyond.
In the short term there will be strong demand for more rentals, just when the supply has actually gone down. Unemployed renters will expand the lower end of the renter market this year but have financial difficulties. This produces more risk for investors in rental property; they should avoid the lower end and stay as close as possible to the center of the market which is what Local Market Monitor has identified as the rent range. After 2021 the lower-end market will again shrink. Remember that the average renter moves within two years; a lower-end property you buy in 2021 may well sit empty in 2022.
Photo by: STRF/STAR MAX/IPx 2020 12/22/20 Permanently closed businesses and retail stores are seen … [+] throughout the US. (NYC)
STRF/STAR MAX/IPx
In the long term the market for rentals will continue to expand. The recession has again increased the number of people who can’t afford to buy a home. The surge of home buying in 2020 pushed homeownership to 67 percent, up from 65 percent in 2019, but that’s probably a one-time event; the recession damaged people’s savings as well as their income.
The fact that the surge in home buying only pushed home prices up 5 percent suggests very strongly that price increases in 2021 and 2022 will be modest. This will vary from market to market but there will be few opportunities for flipping properties in price booms. Rehabbing older ones for resale at higher values will be a much better strategy.
So, let’s identify the most promising markets for different kinds of investing.
Rehab Projects – 20 markets that are good prospects for rehabbing properties to higher values.
Local Market Monitor, Inc.
Table A shows 20 markets where prices were strong in 2020, as well as how much the actual average home price was higher than the income price, which is calculated from local income.
In real estate, the proof of the pudding is always in the eating; if home prices rose well this year, they’re very likely to rise well next year. So, these 20 markets are good prospects for rehabbing properties to higher values.
The home price to income price comparison shows how much risk comes with such projects. In markets like Boise, Tacoma, Phoenix and Tampa, where the home price is more than 25 percent higher than the income price, a boom is underway and investors should avoid multi-year projects.
On the other hand, in places like Memphis, Wichita or Rochester, there’s less chance that prices will fall but also smaller demand for expensive homes, so rehab projects there should have moderate goals.
Rental Properties- 20 markets where the eventual loss of jobs is likely to be small.
Local Market Monitor, Inc.
Table B shows 20 markets where the eventual loss of jobs is likely to be small, because a lower proportion of jobs are in vulnerable categories such as retail, restaurants, tourism, healthcare and manufacturing.
By coupling the vulnerability of jobs (admittedly a speculative effort on my part) with the actual current job situation, we can identify markets that should be good long-term bets for investors in rental property.
The average US job loss in the past year was 6 percent, so a 2 or 3 percent loss right now looks pretty good. Because states have had different shut-down policies, the job numbers aren’t strictly comparable. Similarly, my estimate of how many jobs in each market are vulnerable is mainly relative (the average for 320 markets is 17 percent) and I don’t expect vulnerable jobs to necessarily become job losses.
Still, we know that jobs are the backbone of rentals; the statistics for these 20 markets suggest strong long-term demand from renters.
A few special remarks about the two lists. First, they include just one market from California, which has become so expensive that more people are leaving the state than entering; many of them moving to Boise, Phoenix or Salt Lake City. Second, a lot of these markets are in the center of the country; not so long ago Kansas City, Memphis and Indianapolis were not great investment spots. And third, although by some metrics Boise is the hottest market in the country, remember that the risk of investing there is also growing. Nothing is free.
It will be an interesting year for investors, with short-term disruptions and long-term consequences. It’s a time to really use your analytical skills.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
