Module 7: Current Market Conditions
August 11, 2020
- Monetary Policy
- Video Lecture(s) will be posted here
- Lecture 7.1 Housing Market Collapse + Foreclosure Tsunami
- Lecture 7.2 Eviction and Affordable Housing Crisis
- Lecture 7.3 Covid-19 and Real Estate
- Here are a few links to go with video lecture 7.3
Video: Discussion Commentary – as promised in the discussion thread below, here are some thoughts to go along with my replies to various comments, questions and concerns.
This will be the discussion forum this week! Please leave comments here.
Not related to the topic you mentioned in video 7.2 but I have some other questions. With the way COVID-19 has been affecting business and how employees have been working from home for them, do you think we could end up seeing this same thing or something similar that happened Ohio and all over the country with people walking away from mortgages and the demolition of houses start to happen with large office buildings in big cities? It seems to me that there will be many cut backs made by some of the larger corporations around the country where they realize they do not need all this space for them to operate properly. Do you think that could lead to many vacant properties in downtown areas? Possibly leading to the idea of living in the city and paying outrageous rent to die off since people no long need to be close to work? If so, what will happen to these large cities? Will they start to deteriorate and lose value and become cheaper to live in or do you think they prices will remain constant?
Good questions. Yes, I think high priced downtown office spaces and condos are in big trouble. Smaller more affordable cities might become more attractive. I think we’ll see a lot of variation by location. I’m afraid the industrial midwest will get worse before it gets better. Could be bargains galore. Downtown Seattle, San Francisco, LAX, Portland might take a small hit but people love living on the Pacific too much for prices to plummet. I’ll try to talk more about this in my next video.
Module 7 Discussion: Current Market Conditions
The real estate market is likely to be impacted by this pandemic resulting in a fall of prices especially for commercial properties (business offices). Due to safety and state guidelines in response to the COVID-19 pandemic, employees are encouraged to stay and work from home. In worst case scenarios, office spaces may become abundant and businesses will start using cost saving measures. This will finally result in businesses not interested in renewals of office’s leases in the fore coming future. Under these circumstances, investors will suffer losses and will try to sell their commercial properties at lower prices as supply and demand always plays a role in such conditions. I also predict a fall in prices in residential properties as well, more likely affecting single family homes where affordability will be the case as many people are likely to be laid-off from their jobs. This would also direct investors towards multifamily properties and eventually property and rental prices will rise. Although, it may feel similar to the 2008 financial crisis, if the past is repeated it will be different in the sense that COVID-19 was not the reason in 2008 where financial crisis and recession resulted from years of severely engrained weak spots (low interest rates, bad mortgages, or irregularities in system as whole) in the economy.
I agree with your outlook for commercial office space but I’m not as pessimistic about residential. If unemployment stays high there will be evictions and churn, no doubt. But where are all these office workers? They’re working from home now. A home office has become essential. Demand for small, high priced condos in nyc and other big cities will probably decline. But I see demand for suburban Single family homes holding steady, maybe increasing.
I see the demand for small living spaces in expensive markets decrease because more people are spending their time at home more so than in recent memory. Additionally, people are now working from home and they want a space that it comfortable to work in, which generally includes more space in a house. I see the residential market becoming more attractive for that reason as well as the low fixed mortgage rate that was just reported. Please correct me if I am wrong but the rate right now is 2.88%? My question to you is do you think that office spaces will start to be come less attractive even after this virus by people understanding it is plausible to collaborate from a home office? How then does someone proceed in evaluating these properties to purchase?
Good question Emilio. Valuation for commercial property is driven by rent or potential rent. So for your Final Project you (everyone) can start by estimating or finding rent. Usually a good listing will have a breakdown of income and expenses so it may be a simple look up. Another key data point is number of rental units.
I plan to post a lecture on commercial valuation, hopefully tomorrow. You’ll need the numbers above plus asking price to generate metrics.
Based on discussions in lecture 7, I agree with Dr. Holman that the housing market for the metropolitan areas will be affected but may create better outlooks for the suburban areas and beyond. I also think the commercial real estate market is at risk because companies are learning that they don’t need as much physical space to conduct their business. I believe this market, especially in densely populated markets, will be impacted the most.
I am concerned that the prices of single family homes will fall like they did in 2008, and I am very concerned about how much of it will have to do with the election in November.
I think the market is different now versus 12 years ago only because borrowers are more informed about subprime lending schemes. I know that there are still mortgage programs that will take advantage of people with bad credit or not educated on their options, but I don’t believe it’s as prevalent.
My question is how much do you think the market will be affected is another bailout package is not authorized? Can the government debt bubble that was discussed in last week’s lesson sustain more debt but also how can we not afford to prop our businesses up during this time?
Great comments and legitimate concerns. I think the market is going through a profound reassessment of the relative value of different location types. Some types will gain, some will lag. And this will operate alomg different dimensions. Single family will gain generally, but not in every location. Office space will lag generally, but not in every location. Low density will gain and high density will lag, but not the same everywhere. I think we’re looking at a major rebalancing but not necessarily a widespread price decline. I’ll elaborate on video tomorrow. Good discussion!
Thank you for the video response, I appreciated the information. I wasn’t thinking about the impact of the construction decline on the 2008 economic tsunami, so your explanation make more sense to me. I would like more information about the capital investment section of the final presentation. I think I have an understanding of the ROI and valuation estimates, but need some additional guidance on the “pitch” and the estimates for up-front capital.
I agree with Dr. Holman’s video lecture that the housing market will be impacted by the COVID-19 pandemic. I think this will be especially true in the more densely populated areas that tend to have large amounts of overpriced, smaller apartments and studio spaces. I think prices in those areas will be forced downward to keep interest in that market and to keep people enticed in metropolitan areas.
I think we’re already beginning to see the real estate areas that are impacted and will continue to be impacted until there is a solution for the global pandemic. I think the commercial properties are most at risk. We’re starting to see chain stores, restaurants, and retail shopping centers impacted. I believe the pandemic will also have a significant impact on retail office space. Employers are quickly learning that their work force can shift to virtual offices with an investment in IT infrastructure and computer equipment.
I do think single family home prices will be impacted, but not as significantly as they were in 2008. I think home owners are more educated about predatory lending schemes and won’t be as vulnerable as they were in 2008. My biggest concern is the cost of living increases and unemployment numbers increasing and how those factors will be impacted by the upcoming presidential election in November.
I believe the market is still fragile like it was in 2008, but the uncertainty of the impact of the pandemic is what concerns me the most. Peoples buying habits have changed and I don’t think they are willing to pursue increasing their debt load during this time. I’m also concerned about the governments ability to continue to add to the government debt bubble and the country’s ability to maintain it.
My question would be what do you believe will happen if a second wave of COVID bailout packaging is not approved? I’m equally concerned about the government debt bubble and the impact the lack of an infusion of funds into the market will have on employers who may have to make employment decisions if they can’t keep their workforce at full tilt.
I was in the market last year to purchase a second home with the intent to upgrade from my starter home i am presently in. I was patient and decided to wait due to competitors overpaying. Now i see home prices trending down due to COVID-19 in my area so i am happy i waited. The Heavy Civil Construction industry I work in is classified as an essential business so thankfully my work has not slowed. That being said due to COVID-19 we have been outfitted with home stations and other equipment to work from home in efforts to stay efficient. I agree with Dr. Holman that this pandemic has shown business they can do with less and keep the ball rolling so to speak. This pandemic has closed business that will not be coming back and highlighted a business model that has less employees. I also agree with Dr. Holman that i would want to be holding commercial office space at this time as well as in the future due to the new norms arising out of COVID-19. Do you think we are going to experience a financial tsunami, a second wave when we start realizing the actual national cost of this virus?
Neighborhood Deterioration, “There goes the neighborhood” 60 minutes, was an enlightenment to how the banks continued to act after the market crash. I agree with Dr. Holman, they were holding on to foreclosed properties as to not have losses realized on their books, and avoiding devaluation. What was eye opening were the home owners upholding their upside down mortgages to their own detriment because they in good conscience could not walk away when they could afford to keep it. A strategic default would of been my hand since the banks were not acting in good faith, so why should i.
If i may comment on the PBS Frontline piece “Left Behind America” which i believe to be an intelligent and thoughtful hour of journalism. I found it profoundly disturbing, the fact that the people of Dayton Ohio have been left with such unacceptable devastating consequences due the greed and misconduct of banks, corporations, and our own government. Dayton Ohio is not alone. Minimum wage is not a livable wage especially when you have a family. The US poverty criteria is not a poverty level at all, it amounts to homelessness. In my humble opinion there is a cancer in our country called poverty that we need to address. We cannot compare our labor workforce standard of living to that of a so called third world country, as the Chinese glass factory CEO boldly stated in the piece. With CEO’s making billions our fellow hardworking Americans should not be expected to live on $12 an hour. We need to start talking to each other and ask ourselves who do we want to be. My apologies for telling you how i really feel.
Thank you for sharing your thoughts! I appreciate your willingness to express an opinion. I agree almost entirely. And I think most would agree. It’s when we discuss solutions that conflict begins, mainly about the appropriate role of government. I will add to this via video tomorrow.
Very thoughtful comments! Keep it coming!
Check out this article on refinancing: https://www.npr.org/2020/08/14/902635717/want-to-refinance-your-home-loan-with-record-low-rates-get-ready-for-a-hefty-fee
I apologize for the late addition to the discussion, I didn’t catch we were discussion on here until I was rewatching the video again. I am definitely interested in how the housing market will respond to the current COVID-19 pandemic. I personally feel as if houses are selling faster now than they were pre-pandemic. In Pueblo specifically, I tend to look at listings in both Pueblo and Pueblo West a few times a week and it seems that the houses are on the market for a week or less before they are considered ‘Under Contract’. I have also noticed that the home values are rising in Pueblo (which could have been happening pre-pandemic, but I didn’t notice until now). In October of last year, I was helping my grandparents find a home and we looked at many three bedroom two bathroom homes in the Eagleridge area of Pueblo. When we were looking, they were selling on the lower end on two-hundred thousand; this week I looked at one of the same homes we looked at and it is now on the higher end of two-hundred thousand. In less than a year the price has increased pretty significantly, which I would have expected home values to drop with the current economic situation not rise. I do however see the state of commercial properties to be very concerning. Tele-working is beginning to come across many corporations and businesses since the start of the pandemic and it seems that businesses are not in a rush to get their employees back in person. I am currently doing an internship in Colorado Springs that goes into next year and when I started they said that everyone would be working from home until August, then October, and now they have pushed it clear out to the middle of next year. They have also let us know that this could become permanent as all employees are being effective from home and are not needed in the office to do their work. I’m sure that many companies will begin to do this as well, as the pandemic as opened a door for companies that they have never opened and it seems that they may never close that door. If this were to happen and more people were working from home, I do believe we would see single family homes continue to sell quickly as many would want a ‘home office’ as they are working from home an extended period of time. I also realize that many families will be evicted from their home as they are unable to make ends meet from pandemic related reasons. I believe that the real estate market has to be watched closely to ensure that we don’t get ourselves into a situation like 2008.
I apologize for the late post, I did not realize this was the discussion forum until late. In regards to finding aid for those who struggle to afford housing, I think there are many solutions that can be implemented. One idea I had is to pass some type of bill that gives renters more rights against eviction. If a contract was drawn upon creating a rental agreement, than landlords should only be able to evict upon good reason that the contract was explicitly broken. This reminds me of the termination law in Colorado where any employer is allowed to fire an employee with or without any cause or reason, and without prior notice. Essentially, any worker can arrive to work not knowing if it’s their last day or not. Employees and renters should have leverage in the two critical components that make up their livelihood: income and shelter. This may not make housing more affordable, but it would give more security to renters when planning for the future.
I also agree with your idea in creating more multifamily properties in Pueblo. In my hometown, there are multifamily residential properties that are exclusively for lower income families. Normally, these families are allowed to pay what they can and their rent is determined by how much money they make in a year. Now I am not from Pueblo, but I have not seen a lot these properties around town. I understand that many neighborhoods would be against this type of housing being built near them, however it might be a way to help those less fortunate especially during our current pandemic.
Hello professor Holman,
Sorry for the late discussion comment, I just got back from training all week. With the current world pandemic, I believe that the real estate market is being affected in different ways but people are trying to adjust to our current conditions. People are being cautious and also holding back on purchases at the moment because of the many unknowns. Many are afraid of an economic collapse and are trying to save as much as they can. Many cities have adjusted their rent prices due to the fact that many are under unemployment but here in colorado when it comes to renting I haven’t seen any changes. When it comes to single-family homes I believe that prices are still steadily rising. I don’t think or at least I don’t foresee a collapse like the one in 2008, though there’s the probability of a housing market crash I believe our economy is still pretty strong to counter a collapse.