When there’s an economic crash impacting renters and rental demand, it often takes several months before rents decrease significantly. The COVID pandemic, quarantine, and economic crash are an extreme example of the process at work. Below, I lay out the how this process unfolds and the various factors at play.
TL:DR — If you’re thinking of moving soon, try to wait a few months before you rent or buy, or at least get a month-to-month lease if you can. Rent an Airbnb for a few months if you have to. If you can hold out just a little longer, you’ll find much, much lower prices this summer or fall. By next year, you may even find the deals of the century, perhaps even purchasing one or more properties at 1/100th of today’s prices.
Steps in the Process, by Month
At day 0, a crisis hits. This can be a specific day, as with a hurricane or earthquake, or it can unfold over several days, weeks, or months even, as with a pandemic.
Month 1
In the first month of the crisis, people lose jobs. People also stop moving into the area in crisis, as hiring freezes up everywhere. If the entire planet is in crisis, then emigration and immigration rates drop to nearly zero. Work and leisure travel stops too, which immediately impacts short-term rentals like those found on Airbnb, VRBO, extended stays, hotels, and motels.
Month 2
In the second month, people burn through their savings and rack up balances on their credit cards. Vacancies and available units start to increase. Houses and apartments aren’t getting rented quickly or at all. Homelessness begins to increase.
Month 3
In the third month, people can’t make rent. They begin to voluntarily move out, move in with friends and family, and/or get evicted.
However, some evictions are not currently allowed in the U.S. until August 23rd. This partial moratorium makes the short-term economic impact on renters a little better, but the short-term economic impact on landlords is correspondingly a little worse. The moratorium also temporarily delays the vacancies from flooding the market with rentals. As soon as the moratorium is lifted, all those vacancies will hit the market at once. Many unemployed people will be evicted, and homelessness will soar.
Month 4
In the fourth month (or eighth month, in scenarios where the eviction moratorium applies), optimistic landlords put the vacant units back on the market at pre-disaster rates and wait.
Month 5
In the fifth (or ninth) month, the landlords finally realize no one can or will pay what they’re asking, but the mortgage payments are still due, so the landlords lower rent.
Month 6
In the sixth (or tenth) month, the landlords are finally hurting too, as they now have multiple vacancies, so they lower rents as far as they can to try to at least cover the mortgages. Some also try to sell the properties, but no one will pay pre-disaster prices, which many cash-strapped landlords require in order to pay off the mortgages in full.
Month 7
In the seventh (or eleventh) month, a great many landlords default.
Months 8 through ???
After that, the foreclosures take several additional months to work through the system and get purchased by new owners. Banks are hurting by this point too and get a lot more conservative in their lending, requiring larger down payments and stronger borrowers. New owners buy the properties from the banks, and then often spend a couple months renovating, since the properties are may now trashed. The new owners purchase properties for less than their former values, often paying cash, and thus can afford to offer even lower rents to attract and secure the few available renters.
In some real estate market crashes, many lenders delay selling all of their defaults. For complex and sometimes short-sighted reasons (e.g., quarterly earnings reports), they keep large numbers of empty, foreclosed properties on their balance sheets, sometimes not selling them for several years. If enough lenders hold onto enough foreclosed properties for long enough, market prices may (or may not) decrease slightly less in the short run, but the negative impact on market prices can continue for many years.
Additional Destructive Factors
Other factors also impact the market, further decreasing housing demand and increasing housing supply. In the year or two prior to any crisis or disaster, many building permits are pulled for new housing developments, including single family residences, condos, and multi-family apartment buildings. In fact, market busts are often preceded by a substantial boom. This means the number of building permits pulled just prior to the bust was perhaps an all-time high.
Many, but not all, of these development projects have already been started at the time of the disaster and will still be completed. For larger projects, this process can take several years. This means that even if no new permits are pulled once the disaster happens, lots of new housing inventory will continue to add to the available supply for the year or two following the disaster, even though demand has plummeted. This happens while few new people are moving into the impacted cities or regions. If the crisis is local or regional (as opposed to global), then many people move out of the area during the crisis, worsening the local imbalance of housing supply and demand even further.
Another factor is that many beautiful houses that are rented before the disaster on VRBO, Airbnb, and other short-term and vacation rental websites will no longer have customers. Many of these homes and apartments will switch to longer-term leases as furnished rental homes, in an effort to try to cover the hefty mortgage payments that don’t stop. Other short-term rental landlords will simply default and be foreclosed on, with the homes eventually becoming available for sale and/or rent again. Either way, this adds still more housing inventory to the supply.
Further, many individual renters, often young professionals now tightening their belts a notch or three, will join together and rent as a group. If four friends, who formerly each rented individual apartments or houses, all come together to rent one larger, now cheaper apartment, then each of their prior homes is now made available. That’s a lot less dollars flowing into the housing market on the demand side. It’s also a net of three new housing vacancies (four units vacated so that one new unit gets rented) on the supply side. This grouping trend will continue for as long as unemployment remains high.
House sales follow a similar drawn-out price reduction process, for many of the same reasons listed above. Commercial real estate markets (both rental and purchase) also experience a similar devastation as small businesses go out of business. Further, many businesses with commercial offices may decide to stay virtual and allow employees to continue working from home even after the pandemic is no longer a threat and the quarantines are lifted for good.
In short, no segment of the real estate market is immune.
Three Possible Scenarios
If the overall economy only hits a small bump when disaster strikes, then everything starts to recover before completing the entire process described above. Rents may temporarily decrease a little, but then may quickly return to former levels. This scenario does not describe our the COVID pandemic, quarantine, and economic crash. With tens of millions of newly unemployed and uninsured, countless small and large businesses having permanently closed, and a vaccine nowhere in sight, we’re already well past this scenario.
If the economy hits a big bump but has begun to recover within a year of the start of the disaster, which seems unlikely given our current predicament (i.e., increasing unemployment levels, increasing business bankruptcies levels, and the lack of vaccines), rents will continue to decrease for many additional months or even years. Only a local increase in both jobs and wages will stop this process and allow local rents to level off and eventually begin to increase again. Every city and region will have to mount its own recovery in this way.
If the economy hits a wall when disaster strikes, like we’re experiencing now, then real estate markets begin their inexorable decline starting immediately after the crisis begins.
Further, in the hit-a-wall scenario, we see a new wave of renters, homes, landlords, defaults, and real estate price reductions enter this terrible pipeline every single month. The effects compound.
For example, in the U.S. we’re roughly at the start of month three of the crisis, depending on your location. That means there’s a wave that’s two months along in this process, another wave that’s one month along, and yet another wave that’s just entering the process now.
Each successive wave further reduces housing demand, increases housing supply, and drives down prices on top of the effects of each prior wave. With each new wave and each new month, systems become more fragile and get closer to breaking. Banks can go bankrupt. States and federal governments can run out of both financial and political capital to make the necessary changes. Finally, when the crisis is over, the pandemic is cured, the economy at last begins to rebound, jobs begin to return, and no new waves continue to enter the process, all the current waves will still have to work their way through the entire process, which could take a year or more.
Short-Term Forecast
Remember, we’re only just entering month three of this downward spiral. We’re already seeing all of the above factors and consequences impact the markets, right on schedule. But we’ve only witnessed a small hint of what’s coming. Rents are about to decrease substantially. As in, half what they were in 2019, or perhaps much less.
However, it’s going to take several months before landlords and property managers fully understand the impacts. Right now, many landlords are in denial and are merely slightly surprised that they’re not getting many showings on their vacant units. Properties that would have rented within hours three months ago are now sitting for weeks without any showings at all.
A few landlords have begun to decrease rental prices a little on their listings. Some larger property managers and apartment building managers–that is, stakeholders who tend to feel the impacts faster than individual landlords–have begun dropping prices a bit more, waiving application fees, and slashing deposits. But this is just the tip of the iceberg of the decreases we’ll see in the coming months.
It’s Happened Many Times Before
If you think that I’m being hyperbolic with these catastrophic predictions, consider that during the savings and loan crisis in the 1980s, real estate prices were decimated nationwide in the U.S. Rents also fell to a fraction of their pre-crisis levels.
I have know investors who bought dozens of homes, duplexes, and larger properties for as low as $300 per unit–that’s $300 for an entire house or apartment–in Colorado and other states in the 80s. I know one guy who bought several thousand properties at these prices. These same investors sold these same properties for tens or even hundreds of thousands of dollars per unit in the 90s and 00s. That’s upwards of a 1000X increase in value in the 10-20 years following a relatively small, short-lived crisis.
The Great Depression and other recessions and depressions brought about similar impacts on the real estate markets. Again, if you think I’m being hyperbolic in mentioning depressions, note that the U.S. alone has had four major depressions in the first 150 years after the founding of our country. That’s an average of one depression every 35 years. It’s been 90 years since our last depression. Some economists think we’re long overdue.
Also note that the savings and loan crisis was felt primarily by the finance and real estate industries within the U.S., as opposed our current crisis that’s enormously impacting effectively every industry in every country of the world. What we’re collectively facing right now is far worse in every imaginable way.
Long-Term Forecast
Because of this history, I see that it’s well within the realm of possible outcomes that the next several years will see both rental prices and home prices at 1/10th or even 1/100th their pre-COVID levels. That’s important enough that it bears repeating in case it didn’t sink in the first time.
It’s well within the realm of possible outcomes that the next several years will see both rental prices and home prices at 1/10th or even 1/100th their pre-COVID levels.
I’m not exaggerating. This has happened many, many times before, repeating approximately once per generation throughout all of recorded history. For more recent examples than the ones I mentioned above, consider the crushingly low property values in Detroit or Upstate New York over the past 20 years that resulted from high regional unemployment and emigration.
Different Impacts for Different Stakeholders
Is all of this a good thing or a bad thing? Depends on who we’re talking about.
For homeowners, landlords, and lenders, this crash will be utterly devastating, especially for folks without the cash to ride out the recession/depression until the economy, employment, and home prices recover. If we’re truly in a depression–and it seems likely that we are whether anyone wants to call it that yet or not–the recovery could take a decade or longer.
For renters, losing a job and getting evicted is also devastating. However, for other renters, the decimation of housing prices could save a lot of money during tough times.
For investors, the crash might be rough in the short-term, but it’s a huge opportunity for once-in-a-lifetime gains over the long-term, especially for folks with some cash to invest once prices bottom out.
For the economy, it’s probably healthy over the long term, as I’ve believed that the real estate market “correction” in 2008 didn’t go nearly far enough nor last nearly long enough. This is because real estate prices in the developed world have continued to be massively propped up by historically low interest rates and generous lending terms. Real estate investing is still largely speculative and not fundamental. That is, investors are banking on appreciation rather than cash flows. Housing prices have become largely unattainable for entire generations. Something’s gotta give, and now it finally is.
What about Me?
As for me, I currently rent. However, I’m being forced to move out by a landlord with zero grasp of economics. He just purchased the property in April at a price negotiated pre-COVID. Even though I’ve never paid my rent a day late or caused a single problem in the four years I’ve lived here, he immediately gave me 30-day notice to vacate. He plans to remodel the house so that he can “get higher rent this summer.” As you’ve probably guessed, I think is astoundingly daft thinking. The market will punish him and countless others like him for this lack of foresight.
It sucks to have to move during a pandemic. I’m scared I’ll catch COVID and die while I break quarantine. If that happens, I hope my landlord goes to jail for manslaughter.
The silver lining is that rents are already coming down, and I’m seeing some good deals on rentals available in the market already. Better still, my partner and I may buy a house later this year or next. Perhaps we’ll find a great home at a fraction of today’s prices.
Bottom Line
Bottom line, if you’re thinking of moving soon, try to wait a few months before you rent or buy, or at least get a month-to-month lease if you can. Rent an Airbnb for a few months if you have to. If you can hold out just a little longer, you’ll find much, much lower prices this summer or fall. By next year, you may even find the deals of the century, perhaps even purchasing one or more properties at 1/100th of today’s prices.
Additional Reading
This excellent Bloomberg article from May 12th, 2020, makes many of the same points I do above. The article tells the stories of several landlords and renters who are struggling to stay afloat as they progress through the rental crisis pipeline.