Coronavirus Update - Now and 2008
Before I continue, I have some advice. "Ignore the "experts", they keep getting it wrong." Some examples:
"...if Trump won the 2016 election" Paul Krugman, New York Times chief economist and Nobel Economics Prize winner, predicted that if Trump won the 2016 election: "... we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened."
Chernobyl deaths - In the book "Chernobyl: Consequences of the Catastrophe for People and the Environment". "Nearly one million people around the world died from exposure to radiation released by the 1986 nuclear disaster at the Chernobyl reactor" 5 The BBC did a study and stated approximately 50 people died but that another 4,000 may have received sufficient radiation that they may develop cancers in the future. 6 Wikipedia - 607 Newsweek - 548
In my opinion, the rate of correct predictions by the so called "experts" is little better than random and the articles I read mostly just express the political views of the author.
Below is some information I hope you will find interesting.
"How Big Was The Sell-Off In The Dow Jones Through The Various Market Crises & How Many Months Did It Take To The Bottom?2
- The Great Depression was the most severe stock market crisis to date, with the Dow tanking 89% from its pre-crisis peak. The decline occurred over a period of about 34 months.
- The Great Recession saw the markets fall by 49% over a period of 16 months.
- In comparison, the Dow has fallen by about 28% over the Coronavirus crisis between February 11 and March 12, 2020."
"Whats happening now isnt about a weak financial sector, which was the case in 2008, when there was also a lot of uncertainty about who held troubled securities," said Nellie Liang, former director of the Feds financial stability division and now a Brookings Institution researcher. "This is about a slowing economy and uncertainty about how a virus will play out."3
"While the toll the infection ultimately takes on the nation isnt clear, the economic upheaval caused by the outbreak will likely not be nearly as damaging or long-lasting as the historic downturn of 2007-09".4
"A recession is not inevitable", says Gus Faucher, chief economist of PNC Financial Services Group. "If we do get a recession, it is likely to be brief and much less severe than the Great Recession."4
"U.S. home sellers are not lowering prices, due to low inventory and there are still buyers clamoring to compete for a contract." NAR Survey. This is exactly what we are seeing in Las Vegas as well.
What we are experiencing in Las Vegas today is very different than 2008
- 2008: The 2008 crash was caused by weak financial sector, namely, sub prime mortgages triggering a liquidity shortage which the Fed refused to supply. Companies like Lehman Brothers collapsed, the economy panicked and housing demand fell through the floor causing housing prices to fall. COVID-19: A strong economy brought to a virtual halt by people going into isolation.
- 2008: It took the Fed government several months to react to the 2008 crash and began QE. COVID-19: It took the government only weeks to start pumping liquidity into the markets. I believe stimulus money is very important to stimulate a faster recovery. Another huge factor is that almost immediately, the Fed started supplying almost unlimited liquidity to prevent the market panic of 2008. The Fed did not in 2008, which many believe was the true cause of that recession.
- Historically, the U.S. housing market has weathered all other recessions since 1980. In fact, home price appreciation continued during previous downturns. See Report 1, Report 2.
- 2008: By 2005 the mortgage market began suffering serious problems (see The Rise in Mortgage Defaults). In many cases, people could purchase homes with zero down payment with no proof of income ("no-doc loans"). When foreclosures rose and markets started to panic, the Fed refused to supply liquidity, and the market crashed. COVID-19: The requirements to get a mortgage are high and down-payments are required. There is no sub-prime mortgage crisis.
- 2008: In Las Vegas market, the housing inventory was piling up high before the prices started crashing. COVID-19: The inventory level was 2 months just before the crisis hit, and 6 months inventory is considered a balanced market. Even now, the inventory for $200k - $400k single family homes is still between 3 - 3.5 months, a seller's market.
Will we see a significant price decrease? Not likely due to the low inventory and there is still a steady amount of closings happening.
Will we lose population if the casinos take much longer than expected to reopen? Where can these workers move to where they can walk into jobs, or who will recover faster than Las Vegas?
Right now, we are not seeing any signs of a crash. That said, we are in an unprecedented situation so things could change, especially if the inventory level starts to rise drastically.
Our target tenant pool - We spent a great deal of time and research selecting the tenant pool we target. This pool of people are usually the income producers for their companies. Simplistically, you can divide employees into three categories. At the bottom you have hourly workers, who occupy C and some B class properties. In an economic downturn, they are the first to be let go and the last to be rehired. At the other extreme, you have executives, usually with titles like "Strategic ..." Or "VP of ...". These are highly paid people but not necessary to day to day generation of the corporate income stream, so they are fired to cut costs. How secure is our target tenant pool in difficult economic times? Let's look at what happened in 2008.
During the 2008 crash, our clients' properties did not experience increased vacancy or decreased rent. Below are two charts showing the prices and rents of the property profile that we target.
Price (Median $/SF)
Rental rate (Median $/SF)
As you can see, the prices of the homes dropped over 40%, however the rents were virtually unchanged. This means that if your property was generating a 4% return before the crash, it was still generating a 4% return during and after the crash. This is due to the tenant pool we target. Class C and some Class B properties were a completely different story.
Some more clips I hope you will find interesting:
- Mortgage applications jump 12%, showing signs of consumer confidence returning
- Demand Jumps in Single-Family Rental Market | GlobeSt
- Coronavirus job losses hit these 7 states hardest | Yahoo Finance. Nevada is among the states that have seen least percentage spike in jobless claim so far (4/30/2020).
As of today, out of the current 160 or so properties our clients own, eleven tenants reported problems paying the full April rent. Except for one tenant, who lost their job and requested early termination of their lease; all others have agreed to pay partial rent for April and defer the balance until no later than June 1st.
Below are some of the charts from our latest trailing 13 month market statistics, including April data. Remember that this data is only for the property profile that we target, not for the entire metro area. To see all the charts please click here.
Rental rates saw a slight decrease in April compared to March, but the inventory and time to rent continue to decrease.
Rentals - Median $/SF by Month
Rentals - List to Contract Days by Month
Rentals - Availability by Month
Prices actually increased in April but the transaction volume dropped, which was expected. Inventory continues to decline.
Sales - Median $/SF by Month
Sales - Median List to Contract Days by Month
This is an amazing chart. While the press and others are making dire predictions, properties conforming to our property profile took 18 days to sell vs 8 days in March. 18 days is a very short time between listing and contract.
Sales - Availability by Month
Inventory declined slightly in April.
Sales - Closings by Month
Closings by month decreased, which was expected.
Reacting To COVID-19
Higher priced properties may take a hit for two reasons. First, it appears that jumbo loans are on hold for the time being.9 Second, Chinese, who were a significant percentage of such buyers, are not as present in the market.
There is no good or bad time to buy, there are only good or bad deals. If the numbers are good and it passes all of our validation filters, it is a good buy, whether the market is "good or bad". If the numbers are poor or it fails any of our filters, then it is a bad buy, whether the market is "good or bad".
Mortgage interest rates. A big factor is mortgage interest rates, which are historically low. In terms of how interest rates effect return, if a property generated a 4.4% return at 4.5% interest rate, it would likely generate about 5.8% at 3.75%. As of 5/1/2020 with 740+ FICO the interest rate for a $300,000 investment purchase with 25% down is 3.875% with Keller Mortgage.
Thank you for your time and, as always, we welcome your feedback.
Financial Times - How this market crash is different from 2008, and the same ↩
Newseek - Chernobyl Death Toll: How Many People Were Killed By The Nuclear Disaster? ↩