The 2021 real estate market may be a truly once-in-a-lifetime opportunity for real estate investors. For the first time in nearly a decade, we see a profusion of undervalued properties and widespread financial liquidity—creating the perfect storm for real estate investing.
However, many real estate agents still have a hard time persuading would-be investors that now is the right time to jump into the market. To help you educate your clients, I’m going to share seven highly persuasive reasons why your clients should invest in real estate this year.
Reason #1: COVID Has Created New Real Estate Investing Opportunities
COVID has changed one real estate fundamental forever. In the past, many long-term investors focused on investing in areas with strong employment. Recent thinking went like this: Strong employment attracts people … more people equals higher rents … and higher rents result in higher property values.
Even before the pandemic, we saw a steady shift in the workplace toward remote or virtual work. The pandemic accelerated this transition for both employers and employees. The rapid growth of remote work has expanded the options for savvy real estate investors, as employees move away from urban centers and opt for less crowded, more affordable rental markets.
More People Are Working From Home
Employees who used to commute daily to their office often chose to live within a reasonable distance of their employer. Those same employees may never visit their office in 2021 or they may be required to show their face only a few times a month. Location independence has arrived and remote workers can live hours or even states away from their place of business.
A 2020 survey by PricewaterhouseCoopers (PwC) found that 24% of executives expect that many or all of their employees will remain remote after the pandemic. This phenomenon is one of the main causes of the exploding real estate prices in the suburbs. In fact, moving companies in Brooklyn, New York, can’t keep up. One company even reported a 200% increase in requests for quotes for out-of-state moves over the previous year.
Migration Patterns Are Changing
Remote work is here to stay. Many Americans are gravitating to places with lower housing costs where they can afford larger homes and enjoy a better quality of life. It seems likely that migration out of pricier metropolitan areas is going to continue for many years to come.
This current lifestyle migration creates an amazing opportunity for investors to capitalize on areas that were previously known to have lower long-term appreciation.
If you are an agent in one of these markets or work in a town, city, or state known for its quality of life, then brace yourself. New investment opportunities abound in locations once thought to have little investment potential.
Reason #2: More Inventory Is Coming
I know what you’re thinking: “There isn’t enough inventory already. How am I going to find properties for investors to buy?” Well, the good news is that inventory is due to increase and the opportunities to buy these properties won’t be limited to rural areas.
In addition to creating new migration patterns, the global pandemic has also pushed the U.S. economy into a recession. While this recession hasn’t impacted the real estate market yet, there is a very good chance it will in the near future.
Jobless Benefits Expiring
The $300 per week federal unemployment benefits under the COVID-19 Relief Bill are set to expire September 6, 2021, with no current plans to extend it. This extra money is keeping some American households afloat. The resulting reduction in household income will impact families who are already struggling to keep up.
Reasonably, we can expect this will cause more borrowers to start missing mortgage payments. Housing inventory is likely to increase as more families are forced to sell to avoid foreclosure.
Extensions on Forbearances Expiring
There are currently more than 2.7 million homeowners in forbearance on their mortgage. Amazingly, this doesn’t even reflect private mortgages that are not insured by Fannie Mae, Freddie Mac, and Ginnie Mae.
A forbearance is when a borrower has an agreement with the mortgage servicing company to suspend payments for a period of time. This is traditionally done for emergency short-term situations like illness and job loss.
The current government-backed mortgage forbearance eliminates any requirements for the borrower to show hardship to qualify, causing many market analysts to suspect that there may be more homeowners in forbearance than is financially necessary.
Looming Forbearance Balances
Forbearance balances, the total amount of money homeowners deferred paying under forbearance agreements, may become a nightmare for some homeowners. For example, if a borrower asked for forbearance in March 2020 and extended it until September 2021, they would have accrued 18 months of missed payments.
The reason this situation can become a nightmare for the homeowner is that at the end of the agreed forbearance period, the suspended payments are due in one of three ways:
- Lump Sum Payment
The borrower must pay the entire amount or missed payments all at once. Most people who don’t have the cash on hand to pay their mortgage payment won’t have the ability to pay the balance on the forbearance either. - Short-term Repayment Plan
The forbearance balance is divided up and added as an additional monthly charge on top of the regular mortgage payment until the balance is paid. For instance, if the forbearance balance is $18,000, it could be divided up over 24 months by adding an additional payment of $750 to a family’s monthly mortgage payment. This is a better option than the prior, but only a few will have the income to afford to increase their monthly payment. - Loan Modification
This is a change to the terms of the loan in any number of ways, including extending the repayment period, lowering the interest rate, or even reducing the loan balance. A loan modification may sound like a good solution to the looming foreclosure balances, but financial institutions tasked with collecting mortgage payments will want to ensure that borrowers have the ability to repay their loans. Loan modification may not be a viable option for millions of travel, entertainment, and food service workers who have been laid off and who are now seeking employment in a much tighter job market.
The Moratorium on Foreclosures Will Eventually End
It was obvious to everyone that if nothing was done, the mandatory quarantine that started in February 2020 was going to push many Americans into a financial crisis. In March 2020, the Trump Administration issued a moratorium on foreclosures for all government-backed mortgages. Since then, the Biden Administration has extended the moratorium through June 2021.
Fortunately, most borrowers are still in their forbearance period and lenders are not filing for foreclosure. However, it is still unclear how large the backlog of foreclosures will be once the moratorium is lifted. It is likely that there will be a new surge of listings as the forbearance period ends and financially strapped borrowers will be forced to make the decision to sell.
All of this means it is very possible that by late 2021 or early 2022, tens of thousands of homeowners will be forced to sell their homes to avoid foreclosure. The number may reach into the millions. Savvy investors should prepare for this unique opportunity by building a plan and organizing their finances so they’re ready to buy when these homes come on the market.
Reason #3: Your Clients Don’t Have to Wait for the Market to Fall to Invest
Many people feel that the real estate market may be at a peak and that investing now is a huge mistake. But if you take into consideration the bigger picture, NOW may be the best opportunity in decades for your clients to invest.
Timing the Market Rarely Works
Back in 2018, I predicted that the real estate market was reaching a peak and that it was going to turn any day … and it did. For a few months, at least. Then it continued to rise for the next three years! I have been selling and investing in real estate for over 27 years and I still can’t predict the future. If I can’t time the market, neither can you. Here’s why:
Some Markets Still Appreciate During Recessions
Not all housing markets lose value during a downturn. Many housing markets appreciated throughout the 2008 recession, in cities like Fayetteville, North Carolina; Arlington, Virginia; and San Francisco, California. This was mainly due to strong employment sectors that included military, government, and technology, which weren’t as greatly impacted by the downturn.
The new work-from-home economy and shifting migration patterns may mean that your market won’t be as severely impacted by a shift as other markets.
Fewer Financing Options
Buying at the bottom of a recession isn’t always easy or possible. Consider the 2008 recession. If your client was to buy at the top of the market in 2007 when the average home was $257,000, they would have lost 19% of their home’s value by 2009.
However, if they held on to the property until 2020 instead of selling, the same property would have seen a 134% increase. Of course, if your client could have timed the market perfectly and bought at the bottom of the market in 2009, and then held the property through 2020, they would have gained an additional 19%.
One caveat is that loan qualification requirements changed drastically from 2007 to 2009. Banks required higher down payments and put restrictions on the number of investment mortgages a client could have. They also excluded rental income to offset debt-to-income ratios.
Therefore, it is very possible that your client may not have even qualified to buy an investment property between 2008 and 2014 when the restrictions were finally loosened.
Had your investor waited to buy at the bottom and were not able to, they would have missed out on more than five years of appreciation. That is why the best time to invest in real estate is ALWAYS NOW.
Long-term Buy & Hold Is Your Client’s Best Strategy
Warren Buffett coined the phrase “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes,” and the same can be said for investing in real estate. A long-term investment strategy can protect your clients from the short-term fluctuations in the market.
Focus on educating your clients to look for properties that have cash flow and a long-term upside. These are the properties they would be proud to still own in 10 to 20 years.
Reason #4: Historically Low Interest Rates
During the 1980s, the median U.S. home price was only $66,000. But price isn’t the only factor your investors should consider when deciding on the right time to buy.
Though prices were low in the ’80s, investor qualifications were more stringent, the mortgage payments were higher, and cash flow was very tight. Mortgage rates were over 13% and required the borrower to pay two discount points just to get that rate.
Low interest rates can be an attractive incentive. Today, interest rates are below 5%, investor qualifications are still very favorable, and cash flow can still be found in outlying areas.
Buying Rental Properties Is an Excellent Hedge Against Inflation
The downside of low interest rates is that they can be a driving factor in inflation, which can also be impacted by the government increasing the availability of money. Inflation is the devaluation of the dollar in comparison to the goods and services we buy. Generally, the more money that’s injected into the markets, the higher the prices for goods and services.
The Cares Act and COVID-19 Relief Bill injected more than $4 trillion into the U.S. economy, causing concern about the devaluation of the dollar and an increase in inflation.
Many savvy investors know to reduce their cash savings by buying assets as a hedge against inflation. Rental real estate is an ideal asset that will not only protect against the lost value of the dollar, but will also provide income during slow economic times.
Reason #5: Home Prices Will Continue to Rise
It’s no secret that houses appreciate over time, but many people allow short-term fluctuations to prevent them from entering the market. Real estate professionals know the power of appreciation over an extended period of time, such as 20 to 30 years. This thinking is exactly what will allow you to attract more real estate investors and turn your current clients into investors.
America’s Housing Supply & Demand
The direct cause of housing demand is the population growing from both natural increase (the net of births less deaths) and migration in a given area. Housing supply is the existing safe and functional housing in the area. Supply can only be increased by adding new housing or if demand decreases, making existing homes available.
When demand from both buyers and renters outpaces the supply (current available inventory), home prices and rents will rise. Let’s see how these two factors are projected to behave.
U.S. Population Growth Will Continue to Drive Demand
One of the main causes of an appreciating housing market is a growing population. When an area loses population and there are more homes than people to fill them, then the home values will fall.
For example, during its heyday in the 1950s, Detroit’s population exceeded 1.8 million. Today, Detroit’s population is less than half that, causing the area’s home appreciation to trend far behind other major cities.
The U.S. net population is determined by three factors: birth rate, death rate, and immigration. If the population in America continues to grow, housing prices will also continue to rise. However, if the population decreases, like it did in Detroit, home values may likely fall.
By 2030, immigration is due to surpass the natural population increase and by 2060, the U.S. is slated to reach a population of 400 million, putting enormous pressure on demand for housing. Unlike in Detroit, U.S. housing prices are expected to steeply rise for the foreseeable future.
Another reason why you should convince your clients to invest now to capitalize on the unique economic conditions of 2021.
Reason #6: New Construction Cannot Keep Up With Demand
The simple solution to solve the problem of lack of supply is to just build more affordable homes. If only it was that simple. Gone are the days of buying land and building a few low-cost homes in just a few months.
Fewer Home Builders Today
Real estate markets fluctuate, leaving home builders at risk of losing millions of dollars if the market shifts before their projects are completed. Nearly 50% of home builders did not return after the recession in 2008. Since then, new construction has continued to trail behind demand.
A confluence of other economic factors are expanding the gap between new construction and current housing demand in the U.S., and are expected to put upward pricing pressures on home prices for decades to come. These include slow planning and infrastructure processes, rising home construction materials and labor cost, and the declining profitability of building average homes to meet the needs of the average family.
This means that if you’re not currently counseling your clients about the reasons they should be investing in real estate, you and they may miss out on one of the greatest opportunities in your lifetime.
Reason #7: Rents Will Continue to Rise
The U.S. housing market is reaching a new phase that many other countries are already experiencing—a phase where the American dream of owning a home may not be achievable for the majority of Americans, forcing future generations into rental housing.
Homeownership Rates Declining
With homeownership rates at 63%, the U.S. ranks in the bottom 20% of countries when it comes to homeownership. Homeownership in other developed countries like Britain (56%), France (63%), and Germany (53%) are also low in comparison to countries like China (89%) and India (86%).
Declining homeownership and a growing population will put pressure on the rental market, and there is really only one solution to this problem … but we’re not likely to see it happen here in America.
High-density, Low-income Rental Apartments
The main cause of rising rents is the low supply of affordable, high-density, apartment-style rentals like the ones often seen in countries like China. It is doubtful that most American cities are going to start building affordable apartments to keep up with the population growth. So, like San Francisco is experiencing today, other cities will also find themselves with unaffordable homes to buy and increasingly high rents.
Two Classes of People
In 20 to 30 years, the American dream of homeownership for every family may be lost forever. I believe it is not only our responsibility as real estate agents, but our duty as citizens to help our clients and their families purchase real estate today, despite the current market.
How Do Economic Factors Make 2021 an Ideal Opportunity to Invest?
As we emerge from the pandemic and the recession of the past year, some market sectors will expand and thrive, while others will continue to decline.
Due to job losses and prolonged business closures, many financially distressed homeowners may decide they have no other option but to list their homes for sale. As a result, inventory will increase and we’ll begin to see a shift back to a balanced market.
We’ve also seen significant activity over the past year. Across the country, the real estate industry has been robust. Economic impacts have forced some Americans to move for jobs or due to lack of work, for example.
Many wealthy homeowners have picked up second homes to escape crowded metropolitan areas. Somewhere in the middle, many employees transitioned to working from home, and we all discovered how feasible this might be for the long term.
Combine an expanding market with shifting migration patterns, historically low interest rates, and the country’s already grossly undersupplied housing stock—and you’ve got an ideal opportunity for real estate investors. This unique confluence of economic conditions makes 2021 the best time ever for your clients to purchase investment real estate.
Bottom Line
Despite a short-term recession, house values and rents will continue to rise. While we will see some inventory increases due to some homeowners being forced to sell, the inventory will be absorbed quickly, and the U.S. will soon return to a highly competitive housing market.
COVID will create a unique but brief opportunity for your clients to invest in new markets and purchase underpriced real estate this year. Hopefully, you can use the reasons I’ve outlined here to convince your clients to invest in real estate in 2021. Now is a great time to sharpen your skills and prepare yourself and your clients for the opportunities ahead.
