A Bear Market, Pandemic, and How it Affects You
Explore how market volatility, economic uncertainty, and the effects of a pandemic can impact homeowners, buyers, sellers, and investors. Learn what these changes mean and how to navigate them with confidence.
Today is an interesting day and one for the history books. An 11 year bull run has ended in the stock market and the World Health Organization has officially declared the Coronavirus is a Pandemic creating volatility and fear amongst the masses. While Phoenix has had a strong and thriving Real Estate Market, it won’t be long before the effects of the stock market and pandemic are felt. So how does that ripple effect matter and what can you do to protect yourself?
What is a bear market?
According to Investopedia a bear market is a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Typically, bear markets are associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time – typically two months or more.
What sectors will be affected first?
Phoenix has a large volume of vacation rentals and a strong tourism industry which will likely see the impact of both the Pandemic and the bear market first. VRBO reservations will decline and see an increase in cancellations and it is likely larger events will get postponed or cancelled. This will create a ripple effect that will cause fear among investors as their normally strong returns will face a decline. The first thing we will likely see if that the vacation rental investors will start selling off their investment properties quickly as not to sustain heavy losses however if you have time to ride out the Phoenix Market that has a strong demand for rentals, you could shift into becoming a long term rental.
How do I protect my Investment?
1. Be certain of your numbers. Interest rates are extremely low so many buyers are still taking advantage of the lower rates to find a new home. If you don’t have the time or had already planned on selling your property in the coming 1-2 years, now would be a good time to sit down and look at what the true value is in a shifting market and what the demand is for a home such as yours. We’ve been spoiled with 11 years of market growth so now is the time to re-evaluate what a healthy cap rate is for you to accomplish your goals. According to fortune builders, a good cap rate is 4%. We’ve seen cap rates 3-4 times that over the past few years, so now is the time to shift your expectations. If your investment is below a 2% cap rate it becomes a liability and then you will need to determine your next step.
2. Have a backup strategy. Be prepared to face volatility as the supply of homes on the market increases. Also set realistic expectations and a bottom line for what you need in order to walk away with your cash goal if you want to “sell high.” Look at your long term goals for the property and be flexible. If you don’t want to sell then research your refinancing options so you get a lower rate or change the payback terms. Buyers will be shifting their attitude from paying full price (in a sellers market) to negotiating terms that are more conducive to their needs as the shift continues to deepen so you will need to adjust your expectations for the shifting market.
3. Look for steady growth areas. Avoid new construction and high end real estate as these become the two areas impacted first. According to the Phoenix Business Journal, Pultegroup average home sale was around $380,000 in Arizona. Currently the affordability index in Q3 for Metro Phoenix was 141 based on 174 metro areas. As Phoenix is still on the list for affordability, you can let go of the stress of facing a bear market as long as you invest wisely. According to Dave Ramsey and “data collected by the head honchos of the U.S. Census Bureau, the median home price in 1980 was $147,000 in today’s dollars and then $178,000 in 2000.1,2,3 That shows a growth of about 20% in 20 years. Fast-forward to 2018, and median home prices were around $250,000 nationwide—a growth of more than 40% in less than 20 years! That’s double the growth of the previous 20-year period! You’ve got to love real estate. Now for home prices today. As of May 2019, the U.S. median home price was $315,000. This marks an interesting point in housing pricing trends. While that price is a new record high (woo-hoo!), it’s the slowest rate of growth (6%) since 2015. Affordability determines the health of a market and you can still make a wise investment and take advantage of the low interest rates.
4. Avoid putting too many upgrades into your home. Not every update is a dollar for dollar return on a property, be wise in a shifting market. If you are going to make updates to a home, then the areas you will want to focus on are the kitchen, master bathroom, and backyard. Those will earn you a higher net return.
5. Experience Matters. Ensure you work with licensed professionals who have the expertise to guide your properly through a shifting market. With over 85,000 licensed real estate agents in Arizona it’s hard not to run into someone who is a “Realtor.” However, what you really need in this market isn’t the part time agent who has closed 1-2 deals a year. You need the experience, tenure, and foresight of a seasoned agent who has the production and the expertise to guide you through this time. They say it takes 6-10 years or 10,000 hours to master a trade, you don’t want to hand your largest asset into the hands of someone who has only seen a handful of deals or is a new agent. They won’t be able to guide and coach you properly because it takes foresight that can only be gained by experience. Marketing, networking, a presence in the market- these are all major factors in getting the most out of this market. The agents who give deals and say they charge 1%, ask what they spend on market if they do at all. Why does this matter? According to NAR, 93% of home buyers find their next house online.
6. Don’t Panic. Now is not the time to panic. Plan and be prepared to ride the wave and don’t freak out if you see a slight decline. Markets rebound and this one is no different. Phoenix is a growing metropolitan with a strong demand for housing that we will continue to see in the coming year. As the market shifts into a buyers market, it is a good time for investors to shift into using the cash to purchase properties for short term flips or to add to their inventory.
If you would like to sit down and discuss your current property, your home buying plans, or your real estate portfolio feel free to reach out to me at Lindsay@vistagroup.us
Continue Reading
More from Lindsay's Blog