The housing and real estate market is one of the most important sectors of the economy, and its overall health plays a major role in the retirement plans of most Americans. Selling a home that’s paid off, buying a second home, downsizing to a smaller home, or even investing in real estate. These are all common goals or strategies in many retirement plans. Will some of your own plans have to be abandoned or changed due to the coronavirus crisis? Or are there new opportunities emerging that you might be able to take advantage of depending upon your situation?
How was the Real Estate Market Affected by the Pandemic?
The coronavirus was declared a global pandemic by the World Health Organization (WHO) on March 11th. As with most areas of the economy, the immediate impact on the housing market was chaotic. Sellers quickly pulled their homes off the market or decided not to put them on it. New construction came to a halt and, as millions began to lose their jobs, programs emerged to allow homeowners to temporarily suspend mortgage payments. This caused some lenders to panic and tighten their standards for approving loans. Meanwhile, some states deemed realtors essential and allowed them to continue showing homes, while other states did not. By mid-April, the number of homes under contract had dropped 43% nationally, according to the real estate company Redfin. The drop illustrates just how quickly and dramatically the crisis hit the housing market. As you recall, the impact on the stock market was equally fast and dramatic, with the market losing nearly 40% of its value within two weeks of the WHO’s declaration.
By mid-May, the chaos was subsiding as states began to relax social distancing measures, and realtors adapted to the situation. Virtual open houses and drive-through signings became common. In some cases, a “covid contract” was even created. This allowed buyers to walk away if they had bid on a house without physically visiting it, then ended up not liking it in real life. Despite these workarounds, a recent study shows just how widespread the impact of the pandemic has been. A study by OJO Labs found that 80% of would-be-buyers have either delayed their housing search indefinitely or stopped it altogether. Obviously, if 80% of potential buyers remain out of the market long-term, it has huge implications for anyone looking to sell their home as part of their retirement strategy.
In addition to all these issues, there are also new concerns about a potential huge spike in defaults and foreclosures in the months ahead as laid-off workers and hard-hit businesses struggle to pay their bills. Naturally, the ripple effect from that would hit every corner of the financial markets, as it did in 2008. In fact, the Federal Reserve’s response to this crisis has included many of the same provisions and programs it used during the Financial Crisis—although in most cases they’ve been expanded.
Are We in For a Short-Term Dip or Another Full-Fledged Crash?
So can the Fed’s response and other efforts by the government keep the real estate market from fully collapsing again? If not, what does that mean for the recovery and the markets as a whole? Well, as with everything else related to the pandemic, the answer is: we just don’t know yet. There are basically two possibilities.
The optimistic scenario is that the virus is contained soon (most likely with the aid of a vaccine), immunity starts to build in the population, and the economic reopening keeps expanding. If that happens, realtors will start showing homes and commercial properties again, and hopefully the 80% of potential buyers who pulled out of the market when the pandemic hit will re-enter it. Homebuilding will pick up again. Lending and borrowing will increase enough to allow the Fed to dial back some of its efforts. People who were laid off will get rehired and get back on track financially, and a rash of foreclosures will be avoided. (Cleary this is the perfect scenario Wall Street has been pinning its hopes on. Why else would the stock market have recovered significantly since its initial drop in March, and be clinging to that recovery?)
Of course, the not-so-optimistic scenario is that the health crisis drags on and undermines recovery across the entire economic spectrum, including housing and real estate. If cases continue to spike or another major outbreak occurs, then none of the outcomes mentioned above would seem likely. Rather, realtors would again be limited in their ability to host live showings, and potential buyers who had pulled out of the market would probably stay out of it. Lending and borrowing would remain soft or possibly shrink further despite all the Fed’s efforts, and at that point we could end up seeing negative interest rates. Perhaps most concerning is the potential for prolonged closures and layoffs to result in a wave of defaults and foreclosures. Obviously, much of what the Fed is doing now is intended to prevent that possibility, but in the end the government has no more control than anyone over the virus or what course it may take. Even without another major outbreak, it’s possible the pandemic has already caused enough systemic damage to the economy and markets to make a prolonged recovery inevitable.
What Does it All Mean for Investors in or Nearing Retirement?
With all this in mind I believe the bottom line for all investors over 50 is this: focus on asset protection and retirement income now and prepare yourself to take advantage of possible new opportunities when they emerge. In addition to potential new investment opportunities at the end of the coronavirus crisis, there may be opportunities available now in the housing market, depending on your situation. For example, if you’re looking to downsize, as many people do in retirement, and you have the resources to do it without selling your existing home, you might find a great deal right now. The same is true if you’re looking to upsize or to buy a second home. Those are opportunities you might be able to capitalize on while the housing market is still feeling major impacts from the coronavirus crisis. Looking ahead, other opportunities may emerge at the end of the crisis, depending on what steps you take now to prepare for them.
As I noted earlier, so far, the stock market has been able to cling to its partial recovery since March by shaking off a lot of bad news and staying focused on occasional bits of hopeful news. However, it’s important to understand that Wall Street has been largely in denial about the true scope of this crisis so far, and probably has more pain in store before the stock market really recovers. Most economic analysts agree on this, although there are still plenty of Wall Street cheerleaders out there saying just the opposite.
In all fairness, the cheerleaders could be right. Wall Street’s trust in the Fed may pay off, and the market may keep climbing all the way to the moon. Anything’s possible, but considering the huge number of things that would have to go exactly right for that to happen, mathematically I believe it’s a long shot, to put it mildly.
Be Strategic and Take Advantage of This ‘Gift’!
The good news is that with the market holding on so stubbornly, it’s basically giving you a gift: the gift of time. Time to reduce your market risk at a minimal loss before the next big down-wave kicks in. By doing so with the help of the right advisor, you can also set yourself up to take advantage of the opportunities that emerge once the market does bottom out. Always remember, there is no law that says you can’t buy into the market at another time if you take money out now. One reason the rich get richer is that they always have cash reserves to take advantage of buying opportunities in real estate and the stock market when those opportunities emerge. They use a strategic approach, and you can make that same approach part of your own investing-for-income strategy with the help of the right advisor. Now is the time to do it!