Secondary Markets Outperform Primary Markets

Primary markets as most of you know are suffering. What we are seeing is a lot of secondary markets by the big cities are heating up as the cities cool down. For example, as Washington DC cools, Virginia Beach heats up. Same with San Francisco -> Sacramento and Los Angelis -> Riverside. The truth is, these more expensive cities were already at their tipping point prepandemic. The pandemic only accelerated it.

The cities experiencing the biggest drop off in rent prices generally fall into two categories:
-Markets where the local economy is heavily dependent on tourism (Miami, Orlando)
-Expensive markets (San Francisco, Seattle, New York, San Jose)

Year-Over-Year Rent Growth:
San Francisco & Bay Area Continue Downward Spiral

  • Rents decreased 0.3% in August on a year-over-year basis, unchanged from July. Of the top 30  markets, year-over-year rent growth is negative in 16 markets, a slight improvement from the 17  negative markets in July, with Raleigh (0.4%) flipping positive in August.
  • The three markets with the largest year-over-year rent declines remained unchanged from July:  San Jose (-5.5%), San Francisco (-5.1%) and Boston (-2.5%). Rents in San Jose and San Francisco  have continued to deteriorate rapidly since March, while rents in Boston have remained steady.  Since March, overall rents have declined by $143 in San Jose and $97 in San Francisco.

-Among the markets that flipped negative on a  month-over-month basis in August were Austin  (-0.3%), Tampa (-0.2%) and Seattle (-0.1%).  Tampa fared the worst, declining 100 basis  points in August on a MoM (Month over Month)  basis.

-Tampa is one  of 12 markets where Lifestyle rent growth is out

performing Renter-by-Necessity rent growth.  The Lifestyle asset class in Tampa is likely benefiting from an exodus out of New York, where  renters are used to extremely expensive rental  prices, causing them to be unfazed by the price  of a Lifestyle rental unit in Tampa.

-The downward pressure on rents in Austin could  be from the large amount of completions in the  last few months. As of August, roughly 4% of total stock had been delivered in the past year. Another factor that could be affecting the declining rents in Austin and Tampa is the increasing  homeownership rate.

-While job growth in Nashville and Raleigh was  significantly affected by the COVID-19 pandemic, these two markets fall in the top half of our  Matrix top 30 markets for YoY job growth as of  June 2020. Job growth in Nashville as of June  2020 was -3.2%, while job growth in Raleigh was  -4.8%.

Long Term Impact

As far as longer-term impacts, the pandemic’s effect on rent prices will depend heavily on how quickly the economy is able to recover specific to each area. There are indications that the recovery will be more drawn out than many had initially hoped, making it likely that we’ll see a stagnation in rent growth or even a downward trend because due to large unemployment numbers, families will begin looking for more affordable housing. We may also see a significant slowdown in new household formation, as more Americans move in with family or friends to save on housing costs.That being said, we will see many homeowners become renter’s as well.

 These trends could mean that competition will remain tight for rental units at the middle and lower ends of the market, while luxury vacancies get harder to fill. As long-term remote work gains traction, we may also be seeing the beginning of a shift away from expensive downtown markets and toward more affordable suburbs.

The Real Estate Crash of 2021

A correction is coming to the real estate market and I expect to see it early next year. Each downturn is very similar to the next. We have high unemployment, and housing prices that are extremely inflated. Yet, people keep asking me, “Ken how can you say it’s going to crash when prices are skyrocketing?! I am going to miss out on the buying opportunity if I keep waiting!” So let me put a few things into perspective for you. This is a supply and demand issue. That is what inflates and deflates prices. Inventory vs demand for housing.

First, let’s discuss supply. You have the supply of properties being lowered for a couple of reasons. Reason One, some people are afraid to move. Either because of COVID itself, or the lack of certainty around their job or income. A lot of people are staying put to wait and see what happens. Reason Two, Banks are providing one year of mortgage forbearance. This means the owner does not have to pay their mortgage for one year, and the balance goes on the back end of the loan. Think about it, If someone is out of work and the bank is now allowing them to live mortgage free for one year (ending in April 2021) that person is most likely going to take the forbearance and hope they return to work within that timeframe. These issues are creating very low supply.

Now let’s discuss demand. Demand is about the same and possibly a bit higher with people trying to get out of cash or relocating from a larger city now that they can work remotely, but these buyers are competing for a limited supply, which is what is elevating prices.

Next year I see this house of cards falling. Banks can’t keep giving forbearance on mortgages and I believe most people will still be out of work. When this happens a supply of homes will flood the market and that is when it will start to correct. To see this in more detail please watch the video below!

The Real Estate Crash of 2021 Explained