As we read, daily, about the spread of the Coronavirus (now also called Covid-19, but I will use Corona throughout), we are all concerned about the spread, mortality rates, means to protect ourselves and so on.
The stock market has taken a massive plunge over the past few days, on Coronavirus fears and how they may affect the economy.
Certain industries are already affected, the Olympics may be cancelled, and vacation spots are suffering due to flight and vacation cancellations.
As the stock market goes down, people who own stock feel less wealthy. However, it is reported in many sources that heavy stock concentrations in one’s portfolio occur in the upper quarter of income in the US.
Due to the virus fears, people become less mobile, fly less and stay put more.
The lure of the safety of one’s home gets more into focus.
In the affordable markets in which we invest, the type of homes we buy as investments are the type of homes purchased by homeowners who are squarely in the middle of the pack in terms of income, and even below. It is quite possible that a good segment of this population may not feel less wealthy. Their desire for a home will likely not diminish, and that means the demand for the type of homes we invest in is likely to stay strong.
The Fed is Already hinting that they are considering lowering interest rates to help the economy in the aftermath of the Coronavirus economic effects. That is at a time when interest rates are already some of the lowest in history. If rates go further down, the homes will become yet more affordable, with a potential for even greater demand, and even price appreciation. It is also possible that demand may be increased as some people move out of stocks and seek an alternative investment.
The organic need for families to have a place to live is not likely to diminish in the face of the Coronavirus. If people buy these affordable homes, especially with lowered rates, it bodes well for us investors. If people rent them, it also bodes well for us, as our vacancy rates go down.
There may well be adverse effects such as a dearth of workers due to tighter border controls and less travel, a dearth of building materials which usually arrive freely from all over, including the far east, and other shortages. Ironically, even these adverse effects are likely to increase prices, as supply may struggle to keep up with the usual demand.
This is a good lesson for us about the risk of investing in “vacation rentals”. Many younger investors may not be aware, or have forgotten, the devastating effect of the last recession on vacation rentals. I constantly talk to investor wondering why they shouldn’t buy vacation rentals. Just as in a recession, vacations are a luxury, and this luxury is one of the first to get dropped when circumstances are difficult. Even Airbnb’s may experience pain during a recession, as well as, possibly, in the face of the virus scare.
Investing in single family homes in good areas in large metropolitan areas in the Sun Belt states for affordable prices, looks even more solid in the face of difficult circumstances, relative to vacation rentals. That is one of the reasons this is what we focus on.
One of the reasons I have been so steadfast about investing in single family homes is their vast future benefits, in addition to their great relative safety.
Morgan Stanley just released, on February 28th, a 3-scenario report as to how the virus spread may affect the economy. Currently they are estimating what they call “Scenario 2”, in which the recovery we now experience is stunted in a relatively minor way before means are attained to stop the spread of the virus, as the most likely senario. The 3rd and worse scenario may lead to a recession (albeit after all the checks and balances congress installed after the major 2008 recession, I believe a future recession to be quite a bit milder than the last one, especially since one of the reasons for the severity of the 2008 recession was the massive amount of sub-prime loans, a phenomenon that has been greatly reduced by congress since, and is not nearly as prominent currently.
We have seen prices of homes in many markets drop sharply during the recession, but we also know that simply holding on to the homes, while the 30-year fixed rate loan continues to be eroded by inflation, gets us out of that cycle and into the correction. I myself have already experienced it several times in my investing career.