Miami, FL
October 31, 2022
Hello everyone!
Hello everyone,
I do not mean to spook you this Halloween, but the current economy is not in good shape.
The terrorizing ghosts of past recessions are still in the mind of many people.
And some would like to fly away (in a broom) if needed.
There’s a lot of talk about the current state of the economy in the United States, and there’s a lot of concern about a looming recession. Our generation has already seen a bad recession and the devastating effects it had on the economy back in 2008, which lasted for several years.
Today, however, the situation is rather different, because the roots of the recession back in 2008 were different than the situation we are facing today.
At the time, the recession was triggered by thousands of people defaulting on their subprime mortgages. Their houses had no equity, so nobody would mind losing the property. A lot of people lost their jobs, and the economy was badly depressed.
Now, we have a much healthier economy, the credit for housing has been restricted and homeowners enjoy equity on their properties. According to Attom, a real estate data analytics firm, in the first quarter of 2022, 44.9 percent of the homes in the United States were considered “equity-rich,” meaning the balance of the loan on the home was 50 percent or less of the estimated market value.
So we believe that the current economic conditions will NOT have a devastating effect on the multifamily sector, and in this blog, I am going to tell you why!
First of all: Unemployment is low. Most recent numbers indicate an unemployment rate of 3.6 percent, according to FED reports. Low unemployment means people can afford to pay their rent. Many people may not be able to afford to buy a house, but they will be able to keep paying their rent.
Multifamily is a cash-flowing industry even in hard times.
Second: The demand for goods and services is high.
People are buying all kinds of goods and services reaching and in some cases, exceeding pre-pandemic levels. People are traveling at record levels; people are buying cars, clothes, food, and real estate at record levels DESPITE the higher prices caused by inflation.
This is something we had mentioned before in one of our blogs from last year: people are spending their money in a way described as REVENGE SPENDING because during the pandemic millions couldn’t go out and enjoy almost anything. If you want to read or watch that blog episode I will leave a link to it.
People will typically prioritize their housing over any other expense, so don’t expect people to stop paying their rent in large numbers.
Another trend contributing to the recession is the record inflation over the past months.
According to the US Bureau of Labor Statistics, from May 2021 to May 2022, the Consumer Price Index for All Urban Consumers increased 8.6 percent, the largest 12-month increase since the period ending December 1981.
For multifamily owners and investors, higher rates of inflation mean that the properties that we acquired in the past are valued much higher now. If we decide to exit in any of our investments, we will make a great profit.
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Housing affordability
Many prospective buyers cannot afford a house, so they must keep renting. This is an advantage for multifamily operators because there is a growing population of people who will keep renting for years to come.
The FED has raised the interest rates several times now in an effort to cool down the economy. These higher rates are very discouraging for people planning to buy real estate. So the demand for rents will remain strong, benefiting the multifamily sector for years to come.
Housing shortage
There is also a housing shortage crisis: there is not enough new construction to meet the demand. Federal and local governments have been working to ease this shortage, but this is a solution that will take time. This is one of the reasons that our company has decided to start multifamily projects of NEW construction.
Internal Migration
Moreover, one consequence of the pandemic was the possibility of remote work, and many people took this opportunity to move to other cities. Thousands of people moved away from their expensive rents or taxes in New York City or Los Angeles and bought properties in states like Texas or Florida. Because of that, Florida has seen about 25 thousand people moving to the state just in the first six months of 2022, according to the Department of Transportation that issues driver’s licenses.
We have been studying these migrations and have detected the places where people are moving, to acquire multifamily properties in those communities with record demand for housing rental.
We have expressed this many times: multifamily is a very resilient investment. It was almost covid proof, that if we fall into the recession area, multifamily will be very resistant to any economic downturn.
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Thanks, and I will see you next time!
Warmly,
Abiel
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