Navigating The Shifting Real Estate Industry As A Business Decision Maker

Joseph is CEO of TenantCloud and Rentler, property management solutions that help landlords maximize revenue from rental properties.

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

If it was just investment portfolios that were at risk, it would be fine for real estate professionals, but impacting household savings is an impact on real estate. Knowing how it will impact real estate can assist in being prepared for the rapid changes in the market. Households have been a leading customer, but as borrowing changes, it is worth reassessing the target customer as a way of navigating the next few years as a business decision maker.

To assist during the pandemic, the Fed (Federal Reserve System) bought assets to increase the money supply. In doing so, they added nearly $4.5 trillion to circulation.

What did consumers do with the money?

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

It turns out consumers didn’t just spend all of it; they paid off credit cards—total outstanding credit card debt has decreased by $86 billion since the beginning of the pandemic and currently sits at around $800 billion. They also invested a lot. Crypto investments accounted for $30 billion (paywall), and retail investment in stocks 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—earning basic interest. All this cash burning a hole in their pockets made many people want a house to keep it all in, so some bought some real estate—mortgages increased to $12 trillion, up around $1 trillion from the start of the pandemic.

With a possible recession around the corner, increases in real estate weren’t the worst use of funds. Home owners sit on nearly $28 trillion in equity. To give some perspective, in 2008, it was close to $12 trillion in equity, and the mortgage debt was near $11 trillion. We borrowed $1 trillion for 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 attempting to slow it with higher interest rates. This sets the stage for stagflation, meaning prices increase faster than businesses can cope, so profits drop. Lower profits may force businesses to lay off workers, resulting in higher unemployment.

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

With higher unemployment and less money available for banks, many will find it difficult to obtain a loan. Banks will likely increase their lending standards, so borrowing won’t be guaranteed. Mortgages and home equity loans will be harder to come by, tying up a large portion of household equity. If a home has $250,000 in equity, but the owner can’t get a loan to access the cash, then it’s unusable unless they sell.

When household investors start selling their investments to salvage what they can of their savings, distressed home sales will increase. In 2008, this led to real estate prices collapsing, but this time is different. Now we have too much cash and too many buyers waiting to snatch up anything they can. This is good for the unemployed needing to access their home’s equity, whereas in 2008, there was none.

Real estate prices in general will likely stay high, but I think rapid price increases will be a thing of the past. However, less money in circulation will probably reduce the number of mortgages and home equity loans approved and thus change who is buying homes. The first-time homeowner will again be pushed out of the market as real estate investors continue to buy up potential rentals.

How will business change if fewer people can access their home equity?

Real estate changing hands will bring down home ownership and increase rentals, so I predict property management companies will see an increase in single-family rentals. I think they’ll also see more long-distance owners as corporate buyers and more affluent landlords look for buying opportunities across the country. Property managers should market outside of their normal radius to find more opportunities to expand.

Industry professionals alike will likely see changes in home construction projects, so transitioning businesses focused on roofing, kitchen remodeling and landscaping to retarget what might be a new customer will be important. As homeowners become strapped for cash, corporate and private landlords are looking for depreciable opportunities to offset their growing tax burden. Changing the sales pitch away from a homeowner may mean less profit per job, but to compensate, it also could mean more jobs.

The staycation may become a popular destination again in the coming year as household budgets readjust—leading to a slower short-term rental market. Short-term rentals that have become popular since the pandemic may find that they can still maintain cash flow by transitioning 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 crucial part of any business as it helps in knowing who the current customer is. As this market transitions from homeowners on a buying spree to landlords continuing to grow their portfolios, we, too, should transition who we approach as potential customers.

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