Thursday, September 29, 2022

Navigating the changing real estate industry as a business decision maker

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Shreya Christina
Shreya has been with for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

Joseph is CEO of TenantCloud and Rentler, real estate management solutions that help landlords maximize rental income.

The last decade saw one of the longest growth periods in history, and the pandemic gave us the fastest whiplash of the century. Both periods of growth made many people appear to be investing geniuses, but the downturn is testing those theories and will prove many of them wrong.

If it were only investment portfolios at risk, it would be fine for real estate professionals, but an impact on household savings is an impact on real estate. Knowing how this real estate will affect can help you be prepared for the rapid changes in the market. Households have been a leading customer, but as lending changes, it’s worth reassessing the target customer as a way to navigate the coming years as a business decision maker.

To help during the pandemic, the Fed (Federal Reserve System) has been buying assets to increase the money supply. They do that added nearly $4.5 trillion to circulation.

What did the consumer do with the money?

Consumers spent some on education as student debt rose from $1.5 trillion to $1.6 trillion, and how do they get to school if they don’t have a car? Auto loans rose to $1.5 trillion, from $1.3 trillion at the start of the pandemic.

It turns out that consumers didn’t just spend everything; they’ve paid off credit cards — total outstanding credit card debt has fallen by $86 billion since the start of the pandemic and is currently about $800 billion. They have also invested a lot. Crypto Investments good for $30 billion (paywall)and retail investments in equities and bonds increased by nearly $1 trillion in 2021 alone.

Many people didn’t know what to do with the money, so they put it in the bank. Some of it still sits –about $1 trillion in cash— earn base interest. All this money burning a hole in their pockets made a lot of people want a house to keep everything in, so some bought some real estate – the mortgages soared to $12 trillion, increased by about $1 trillion since the start of the pandemic.

With a potential recession just around the corner, real estate booms weren’t the worst use of funds. Homeowners sit on almost $28 trillion in equity. To give some perspective, in 2008 it was nearly $12 trillion in equity, and the mortgage debt was nearly $11 trillion. We borrowed $1 trillion in mortgage debt to gain nearly $12 trillion in equity — not a bad return on investment.

So, where would it start if a recession hits, and what impact would it have on the real estate industry?

Given the amount of cash in circulation, inflation is already high, and the Fed is trying to slow it down by higher interest rates. This is the basis for stagflation, which means that prices rise faster than companies can handle, causing profits to fall. Lower profits can force companies to lay off workers, resulting in higher unemployment.

With so many unemployed, companies are likely to assume lower future sales and lay off more workers. Fewer workers in the market trying to do the same amount of work can lead to supply shortages. As a result, prices rise, profits fall and unemployment rises.

With higher unemployment and less money available to banks, many will find it difficult to get a loan. Banks are likely to increase their lending standards, so borrowing is not guaranteed. Mortgages and mortgages will be more difficult to obtain as they occupy a large portion of household wealth. If a home has $250,000 in equity, but the owner can’t get a loan to access the money, then it’s useless unless they sell.

When household investors start selling their investments to save as much of their savings as possible, distressed home sales will increase. In 2008 this led to the collapse of real estate prices, but this time it is different. Now we have too much money and too many buyers waiting to grab everything they can. This is good for the unemployed who need access to the equity of their home, which was not available in 2008.

Property prices in general are likely to remain high, but I think rapid price increases will be a thing of the past. However, less money in circulation is likely to reduce the number of mortgages and home equity loans approved and thus change who buys homes. The first homeowner will once again be pushed out of the market as real estate investors continue to buy up potential rental properties.

How will business change if fewer people have access to their equity?

As real estate changes hands, home ownership will decline and rents will increase, so I predict real estate management companies will see an increase in single-family rentals. I think they will also see more long-haul owners as corporate buyers and more affluent landlords seek buying opportunities across the country. Property managers should sell outside their normal radius to find more opportunities to expand.

Industry professionals alike are likely to see changes in housing projects, so it’s important to move away from roofing, kitchen remodeling, and landscaping companies to retarget what a new customer could be. With homeowners strapped for cash, corporate and private landlords are looking for write-off options to offset their growing tax burden. Taking the sales pitch away from a homeowner may mean less profit per job, but it could mean more jobs to compensate.

The staycation could become a popular destination again in the coming year as household budgets adjust, leading to a slower short-term rental market. Short-term rentals that have become popular since the pandemic may find they can still maintain cash flow by switching to long-term rentals.

Down markets happen, and we live through them, so being prepared is key. Markets move and change hands every day. Knowing which hands have the money and which don’t is a critical part of any business as it helps to know who the current customer is. As this market moves from homeowners on the hunt to landlords who continue to expand their portfolios, so too must we shift who we approach as potential customers. Business Council is the leading growth and networking organization for entrepreneurs and leaders. Am I eligible?

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