Banks’ Loan Forbearance Under The CARES Act

Tenants, Stimulus, and Inflation

One of the worries landlords have these days, is that due to the Covid-19 situation, some tenants who may lose their job, will be unable to pay rents.

We have already addressed this (banks also allow leeway in mortgage payments etc.). However one point to consider is the following.

Unemployment benefits have been beefed up aggressively by the government. Once people who are unemployed or partially employed start getting their unemployment benefits (hopefully any minute now), and due to the enhanced payments, many people will earn about as much as they did while they were employed. Especially in the median income territory, where a lot of our tenants live.

This is something to consider, as the fears may have been over-blown. The unemployment payments are slated to be serious, and make a big difference. The idea behind them is that unemployed or partially employed people, could pay rent, buy food and gas etc.

On the issue of the government stimulus overall, the US government has just come out with a stimulus of over 2 trillion dollars. The Fed is also injecting liquidity into the financial markets, to the tune what appears to be 4 trillion dollars. The Government is already seeking a second stimulus (possibly having to do with massive infrastructure once people can be out and work), also seemingly to be about 2 trillion dollars.

With all these trillions of dollars essentially just being “printed by the government”, any economist will tell you that it will very likely create inflation. Possibly a strong one, once things are recovered.

At the same time, interest rates are close to being the lowest in history.

Once again, you can buy a single family home now, with a 30-year fixed rate loan at maybe the lowest rate ever. Then the home price is likely to go quite a bit higher just due to inflation (not even counting real appreciation). The mortgage does NOT go up with inflation, of course. Thus, as I always say, the 30-year loan gets eroded by inflation, and your equity gets built up faster thanks to inflation. Hard assets benefits during inflationary times, and are usually the safe havens investors go to. Single family homes are not only a hard asset , but an undeniable necessity (as opposed to office buildings, for example, since people can work from home. From HOME! Yes they need a home). Also, they are the asset class on which the fixed rate loan, which never changes with inflation for as long as 30 years, can be obtained.

When inflation hits hard, you will likely feel pretty smart having bought single family home investments, with fixed rate loans.

COVID-19 Effects on Rents & Renters

We hear the concern that some tenants may not be able to pay rent due to the Corona virus crisis.

While this is a valid concern, there are a couple of things to consider:

We talk about buying new homes in good areas. When these are the homes you buy, the likelihood of your tenants being “white collar” is high.

White collar employees are the ones who usually have the easiest transition to working from home. These would be high tech employees, engineers, etc. These types of employment lend themselves easily to working remotely, working from home, using Skype and Zoom for video meetings etc.

Thus, the likelihood of white-collar employees not being able to pay their rents is lower.

This is another example of why it makes so much sense to buy good homes in good areas.

Many new investors are attracted to the lower costs and supposed better cash flow (on paper), of house located in bad areas.

What is happening now is just one example of why that may not be a good idea.

An exception is very low-end areas, where most of the tenants are HUD-and-Section-8-helped tenants. HUD and Section 8 will continue to pay rent for the tenants regardless. However, these types of houses are always challenging and their future appreciation may not be as high as good homes in good areas.

During the last recession, which started in 2008, we obviously bought homes not only in good areas, but picked up bank foreclosures in any areas, including blue collar locations. However, during regular times, buying brand new homes in good areas is a staple of smart investing.

There may also be help on the other end for landlords, if rents aren’t being paid, there are forces now working with lenders to give abatements and postponements of mortgage payments. When there is an issue at one end, the other end has to be addressed as well. In California there are already lender concessions to 90-day delay on mortgage payments by some of the major banks, with no repercussions to the mortgage payers, or late fees.  It is likely that the rest of the nation will follow suit.

We will discuss this, and other issues, during our next big 1-Day Expo on May 16th. If by May 16th large public gatherings are still not happening, we will have the event online.

Will COVID-19 Cause A Recession?

As we all observe and fear the Coronavirus, we see many cities under “shelter-at-home” restrictions, and many “non-essential” businesses closing. Then on the other hand, the Fed lowered rates almost to zero, and mortgage rates, after a short spike, are starting to settle down near the lowest point ever. Some people fear a recession is likely to follow, and if we remember the recession of 2008, I think it’s quite possible. That depends, of course, on the length of the lock-down.

If a recession does occur, let’s point out some of the differences between the recession of 2008 and the next recession, if it hits.

Before the 2008 recession happened, there was a major boom in many states. Home prices in states like Arizona, Nevada and Florida went through the roof. The media was shouting “It’s a bubble! It has to burst!” Prices of homes in Phoenix, for example, nearly doubled from the beginning of 2004 till the middle of 2006. Not all states participated in the party, for example, Texas and Oklahoma have not gone up very much during that time.

When the 2008 recession hit, the markets that went down precipitously were, of course, the exact markets that had participated in the 2004-2006 boom. Places in Arizona, Nevada, Florida, and other states. Prices tanked and crashed quite a bit. However not across the board, states like Texas and Oklahoma did not go down very much during the recession of 2008.

By contrast, at the present time, especially in affordable markets like Oklahoma City, Tulsa, Baton Rouge, Central Florida, parts of Atlanta, Raleigh and others, there are currently no price bubbles. No major boom has happened, Thus the likelihood of a major price crash in such markets is much slimmer than the markets which crashed in the 2008 recession. There are very high priced markets now, the expensive markets in San Francisco, for example (which has already started going down in price last year). In such markets, there may be a stronger effect on prices. Also, when you invest in a brand new home in a good area in Oklahoma and pay $170,000. You are buying the home not much over the basic construction and land cost. Again, the probability of an “intrinsic value” home like this going down much is small. By contrast, a $2M home in San Francisco, which cost $900K to build, has a lot of “air” in the price, with a higher likelihood of prices going down in San Francisco.

The recession of 2008 was created by housing. Lenders released all limits, and loans were made to virtually anyone that was human, almost regardless of credit or ability to pay. Some loans were up to 125% of the value of the house. This bad debt, called “sub-prime”, was then packaged among other debt, and amazingly, the credit agency gave these packages high ratings, as if it was a quality debt product. Then these faulty packages sold on Wall Street, and financial wizards found way to leverage them enormously. Once defaults on the bad loans started to hit, the entire structure unraveled.

By contrast, at the present  we are still under the Dodd-Frank Act, which was drafted after the 2008 recession. Borrowing is now much harder and lengthier than it was before the 2008 recession. Even borrowers with great credit are finding the current loan processes frustrating. The amount of sub-prime loans is minuscule relative the period preceding the 2008 recession, and steps were taken to make the abuses with rating agencies be much harder to repeat. Thus the next recession is likely not to be caused by bad loans. It is clear that if another recession comes, its effects on rental home investing will be quite different than the recession of 2008.

I believe that the best way to invest in real estate is to buy brand new homes, in affordable large metropolitan areas, where the rent numbers match well with prices. Then finance the homes with a fixed-rate loan. To the best of my knowledge long term fixed rate loans like we get here in the US don’t exist elsewhere. The monthly payment and the mortgage balance never change with the cost of living, while everything else does. That means inflation constantly erodes the true buying buyer of your debt, making your debt ever smaller in real dollars.

For these kinds of homes, purchased anywhere from $150K to $250K, I believe the effects of the next recession will be minimal. Rates are very low, however, so fixed rate loans will retain these great rates forever.

The act of buying good rental homes in large metro areas and holding them as rental for the long term, where  the loan erodes, is a future-changer. It does not change your future instantly or even within a short time, but over the long term, this strategy is a powerful future changer. I have seen people retire well, send kids to college, and look much stronger financially thanks to these simple yet powerful investments.

Since these investments show their power over the long term, and since the interest rates are so favorable now, and since a possible impending recession is unlikely to have effects on prices like the 2008 recession, I believe this would be a good time to invest.

As an extra “bonus”, the virus fear creates more flexibility with sellers, including builders, and the ability to negotiate better prices.

I would be happy to discuss it with anyone who may wish to inquire further.