We spend a great deal of time, as we should, discussing the income and operating cost side of the residential real estate rental market. However, as any savvy real estate investor will tell you, that’s not the whole story. An essential part of the real estate investment equation is the value of the rental property.
A surprising aspect of the 2020 COVID pandemic has been a stunning rise in home prices. We deliberately created a flash recession through pandemic lockdowns starting in March of last year. Traditional economic theory would strongly suggest that single-family home prices would likely decline during recessions/downturns, not rise. So what’s going on?
Let’s start with the metrics. On December 23rd of 2020, the Federal Housing Finance Agency announced that its index of U.S. house prices rose a robust 10.2% from October 2019 to October 2020, with a 1.5% rise in October 2020 alone. Extrapolating the October 2020 performance over 12 months, that’s an 18 percent annual rise.
What’s causing these extraordinary price rises in single-family home values? According to Harvard University’s Joint Center For Housing Studies, we do not see these price increases due to tight labor markets, high inflation, or a loose lending mortgage bubble. Rather, these price raises are being caused by:
- Ultra-low Interest Rates
- Housing Production Shortfalls
- Fewer Houses Are For Sale (Low Inventory)
- A Shift In Family Spending Towards Housing
- An Acceleration In The Purchase Of Second Homes
Quoting the author of the Harvard study, Mr. Don Layton, “All of this creates a perfect storm, where long-term pressures are joined by short-term ones to push the prices of houses higher at an unusually rapid pace, easily overwhelming the downward pressures that come from increased unemployment during the pandemic.”
The website Redfin.com tracks home sales and prices nationwide. According to their website, the average sale price of a home in Westchester County is $610,000, up 23.2% since last year. Per square foot prices have reached $311, a 15.8% rise over the previous year.
Here are two additional factors to consider –
Foreclosures loom. At some point, the moratorium on foreclosures will be lifted in New York State and nationally. Will this cause housing prices to fall? No, according to Harvard and Mr. Layton, “With a greater cushion of equity, troubled homeowners have dramatically improved options: a greater ability to access funding (e.g., home equity lines) to keep paying monthly expenses until family finances might recover, improved ability to qualify for and support a loan modification, and, if push comes to shove, the ability to sell the home and monetize their increased net worth while reducing monthly payment obligations.”
Do low-interest rates help homeownership? For existing homeowners, the answer is an unequivocal yes. For first time buyers, with rising prices, required down payments are higher. For real estate property investors, the value of their property portfolio has substantially increased, but their cost of acquiring new property has climbed if they can find any investment property to buy.
Mr. Layton’s and Harvard’s overall assessment is, “Today’s high rate of house price appreciation builds upon supply and demand imbalances that have been growing for years, and the pandemic seems to be introducing and accelerating changes in fundamentals about the economy that add to the momentum. Therefore, I see today’s downturn-defying, strong house price growth not solely as a cyclical distortion that will quickly go away when the pandemic does; I see it, at least to a significant degree, as a more fundamental change than that.”
Residential rental real estate has always been a solid investment if properly managed. As of February 2021, we are experiencing high rental demand in Westchester County and rising home prices, literally the best of both worlds.
But 2008 was only twelve years ago. We all remember what happened then, a price and demand collapse occurred because of a credit bubble. Regardless of the cause, my point is that real estate investors should not grow complacent. We need to stay well informed and ready to adapt to any change in market conditions.
The ideal scenario would be that the COVID crisis abates as most of the population gets vaccinated. Then, social and business life can return to something like a pre-pandemic normal. When that happens and the real estate market adjusts, we should see more supply and more demand for owner-occupied and rental single-family housing.
If you have a residential property or properties in Westchester County that you are interested in renting, now is the time to put them on the market. At Sterling Property Solutions, we have a team in place that can answer all your questions and address any challenges. If you are already a landlord and no longer have the time or desire to handle rental property management on your own, we can help. Maybe your current property management company is not giving you the top tier service you deserve. If so, reach out. We are there for you.
Please give me a ring at 914-355-3277 or send me an email at Linda@Sterlingpsi.com. Together, let’s form a plan for you to take full advantage of the current conditions and put in place a robust, long term program for your success.