How does economic improvement affect real estate investors?

A slew of recent data from across the economic spectrum suggests that an economic recovery is gaining momentum and directly affecting individuals across the country.

Let’s briefly list some key economic indicators and reasons why these data point to good prospects for real estate investors.

Employment opportunities

Job growth is one of the most important economic indicators and has been trending in the right direction for several months now. After the initial rise in unemployment in March and April as a result of the COVID-19 crisis, unemployment claims stabilized around September 2020, as you can see in this press release from the Ministry of Labor.

Note that this graph only shows the data for the last year. Before the pandemic, weekly claims averaged around 200,000, and stabilization in 2020 was much higher (around 850,000).

Data from the Department of Labor shows that initial jobless claims have declined by about 40% since early 2021. For the week ending May 15, claims dropped from 478,000 to just 444,000 in one week.

This decline in new unemployment has dropped the unemployment rate nationally from a peak of 14.8% in April 2020 to 6% in March 2021.

There is still a long way to go to get back to the February 2020 unemployment rate of 3.5%, but employment is definitely moving in the right direction.

Personal income

March was an excellent month for personal income, according to the April 30 publication of the U.S. Bureau of Economic Analysis.

November 2020December 2020January 2021February 2021March 2021
Personal income
Current dollars-1.20.510.3-7.021.1
Available current income
Current dollars-1.40.611.6-7.923.6
Chained (2012) dollars-1.40.211.3-8.123.0
Personal Consumption Expenses (PCE)
Current dollars-.06-0.63.4-1.04.2
Chained (2012) dollars-0.6-0.93.1-1.23.6
Price indexes
PCE0.00.40.30.20.5
PCE, excluding food and energy0.00.30.20.10.4
Price indexes, year by year
PCE1.11.21.41.52.3
PCE, excluding food and industry1.31.41.41.41.8
Unless otherwise stated, all figures are percent change from the previous month

The report begins that personal income is up 21% ($ 4.2 trillion) from February’s numbers, with disposable personal income growing even faster by 23%. Much of this is likely bolstered by federal stimulus controls, but the total amount of that package was just under $ 2 trillion, and much of that money has yet to be spent. So even if you subtract the incentive money from these numbers, there was still tremendous growth in personal income in March.

Wage growth

It’s not exactly a change from recent trends, but it’s worth noting that the pandemic hasn’t really affected growth.

It’s not exactly exploding either, but it’s encouraging to see that despite all the economic volatility of the past year, wage growth remains stable at around 3.5%.

Delinquencies on mortgages

Fannie Mae’s monthly publication highlighted that the “ serious delinquency rate ” – loans that are three or more months past due or already seized – fell from 2.76% to 2.58% for single-family homes and dropped from 0, 84% to 0.66% for multi-family properties. In comparison, in February 2010 this measure peaked at 5.59% – the numbers are now much better than after the financial crisis.

GDP growth

All of this data boils down to bullish forecasts about GDP growth. According to the Calculated Risk blog, three major forecasters see big growth for the second quarter of 2021. Goldman Sachs forecasts growth of 10% quarter-on-quarter, the NY Fed forecasts 5.3% and the Atlanta Fed forecasts 10.4 %.

Takeaways for real estate investors

To me, this data points to three positive trends for real estate investors.

More stable tenants

Investing in rental properties is returning to a much more normal level of risk. During COVID-19, no one knew what would happen to unemployment, lockdowns, incentives, etc. This created enormous financial uncertainty for landlords and tenants alike. Investing in rental properties has been riskier than I can remember for the past ten years.

With the economy picking up again, the personal financial situations of current and future tenants are much less tied to events beyond their control.

Improving employment and GDP growth create an environment where more tenants can meet the obligations of their leases. This should give rental home owners much more confidence that vacancy rates and on-time payments will soon return to pre-COVID-19 levels.

Potential rental growth

It was not for nothing that I threw into the table about wage growth. Recently I wrote about the relationship between income growth and rental growth. In principle, the rent can only grow so strongly without increasing the income of the tenants. That should be fairly intuitive, but it’s worth noting.

Wages continue to rise above 3%, meaning rental growth is likely to continue, albeit more modestly than in the last ten years. Coupled with employment growth, competition for rental units should intensify in the coming months, which could drive up rents.

Strong fundamentals in the housing market

The fall in the backlog suggests that the fundamentals of the housing market are still quite strong. Yes, prices are going crazy, but that’s because of historically low inventory and low interest rates.

One thing that can lead to house price depreciations is a high number of foreclosure sales, as we saw around the financial crisis. Any increase in delinquencies is a red flag for house prices. On the other hand, fewer delinquencies are a positive indicator.

There are of course many more factors in the housing market, but under the same circumstances, less overdue receivables means less decline in the housing market.

Look forward to something

In general, almost all economic indicators point to a very strong second quarter and 2021. While the housing market is not directly linked to the economy as a whole, they are correlated, and any positive economic news should be seen as positive news for real estate investors.

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