Hindsight is 20/20.  So, Just How Will We Look Back on 2020?     

Hindsight is 20/20.  So, Just How Will We Look Back on 2020?                                           BY: ND

The real estate market is at an interesting point, both here in Orange County and across the United States.  What was formerly a healthy economy has been upset in recent weeks by an abundance of unemployment claims and job losses in response to the Covid-19 pandemic.  Although significant, as evidenced by other countries across the world, this is temporary and we will soon be back to work.

As we get back to work, some behavioral patterns and real estate consumer/professional trends will change, but others will remain the same.  Summertime is historically the time people looking to move, buy or sell a home do that and for those looking to do so now, they can expect to take advantage of record low interest rates.  Today’s 30 year fixed rate mortgage sits at 3.23%.

Shifting to multifamily residential, inventory is down.  Because of the immediate market challenges, deal flow and transactions are down, buyers are seeking price adjustments and there are just not that many investment opportunities for investors who remain active in the market.  Price adjustments or “re-trades” in response to Covid-19 have been in the 5% to 10% range (off of the contract price).  

What will likely have a bigger impact on the multifamily residential market once inventory comes back will be the increased reserves required by lenders.  While Fannie and Freddie don’t account for all market activity, they do account for about 42%.  Borrowers working with Freddie can now expect to pony up 9 months of principal and interest, but those working with Fannie can expect to fork over 9 months of principal, interest, taxes and insurance.  With still record high prices in many coastal markets (Orange County included) this will weigh on returns.

Even with the increased reserves now required, the investment outlook for apartments remains strong.  When things get rough, I sometimes look back at the old spreadsheets I have prepared over the years in an attempt to underwrite investment opportunities.  More often than not, even when things were tough, if you bought and held for 10 years +/-, you’ve done OK.  Case in point, I found a spreadsheet for a deal I underwrote in Anaheim back in 2010.  Cost per unit was somewhat attractive, but rates were high and rents were low and for whatever reason, we passed.  The property sold for around $125k per unit back then and recently traded for $240k per unit.  Asking rents were up $500 + per unit on average over that time (from $1,300 to $1,841) and interest rates went from 6.25% to 3.5%.

Remember: tough times don’t last, tough people do.