Assuming you’ve already read my March 22 introduction to personal finance during the plague, you’re already well on your way to getting approved for unemployment insurance, SNAP, Medicaid, WIC, and any other welfare programs you might be eligible for.
So in today’s edition of “personal finance during the plague,” I want to take a look at an issue that should be on everybody’s mind, in one form or another: real estate.
I’m a renter, and it so happened that in the weeks leading up to the plague I was looking for a larger apartment. We looked at quite a few units, but didn’t end up making a decision before we were put under quarantine and the search ground to a halt.
The most recent analogy to our present economic crisis is the Great Recession, which featured devastating job losses while leaving the country’s physical infrastructure intact. If you were lucky enough to keep your job in 2008-2009, you had your pick of deeply discounted rental units as vacancies stretched from months into years.
For a variety of reasons, landlords have historically been extremely reluctant to actually lower the monthly rent they charge. Discounts instead often take the form of some number of months of “free rent” at the beginning or end of your lease, or in waived application fees. In my city those application fees, which can include credit check fees, “move-in fees,” “key fees,” etc., can stretch into the many hundreds of dollars.
Unless you track rents closely, you’ll probably see higher vacancy rates first appear in the form of those discounts. As unpaid rent mounts and evictions begin in 2-4 months, many more units should come onto the market. If you’re planning to move only opportunistically, then you may want to hold out for at least 2 months in free rent, or a comparable (~15%) drop in monthly rents. If your need to move is more urgent, then you might look for landlords offering discounted short-term leases, or who are willing to waive application and move-in fees.
It’s never been clear to me why tenants are expected to pay those fees in the first place, except that housing is so scarce that they can be coerced into doing so.
If you live in your own home: congratulations! Your situation is a little less parlous than your renter comrades. But you’ve still got some important decisions to make. There are three main issues to consider.
If you have a mortgage on your home, lost your job, and are unable to make your payments, then stop paying immediately. Every payment you make after the last one you can afford is a total loss; in foreclosure, your property will receive much less at auction than you owe, and your equity will be wiped out.
Obviously there are exceptions. If you’re one payment away from paying off your loan, you should make that last payment even if you have to rob a bank to do it. But most people, most of the time, will simply be throwing good money after bad by making mortgage payments they can’t actually afford.
If you have a mortgage, kept your job, and are able to keep making payments comfortably, then consider refinancing your mortgage. It’s true rates have been low for a long time, but if you shop around you might find they’re even lower than the last time you checked, especially if you have good credit and a well documented income history.
Mortgage finance is extremely boring so I have endeavored to learn as little about it as possible, but as a rough rule, the closer to the beginning of your mortgage you are, and the bigger the difference in interest rates is since you borrowed, the more you’ll save refinancing your mortgage. The closer to paying off your mortgage you are, and the smaller the interest rate difference, the less you’ll save, due to the fixed costs lenders charge when originating loans.
If you own your home outright and kept your job, you’re in the best position to maximize the opportunity offered by the plague. In the simplest form, you can simply take out a low-interest home equity line of credit in order to maximize your IRA and 401(k) contributions this year. Since the $6,000 IRA and $19,500 401(k) per-person contribution limits are based on the calendar year, they’re “use it or lose it;” once the calendar year ticks over, you’ll never be able to shield those assets again. That’s why borrowing — at a sufficiently low interest rate — as much money as you need to hit those limits is a no-brainer.
Buying during the pandemic is much like renting, but with additional complications. On the one hand, properties that were already on the market are likely to see large discounts as sellers become even more motivated. If the depression lasts long enough, owners who need to sell due to job losses will also be flooding the market with new properties. The flip side of that is owners who might have considered selling at the previous high-water mark will likely shelter in place and feel no urgency to move if it means accepting anything less than the highest Zillow score their home ever received.
In our area, we’ve seen home prices drop far more than rental prices so far, as sellers become more motivated, more quickly than landlords. As the depression wears on, I believe rental prices will drop further; home prices remain an enigma for now.
Finally, keep in mind that while your lender or title company might be willing to make accommodations to avoid in-person inspections and appraisals, you’re the one who is going to have to live in the home: if you can’t get a house thoroughly inspected, you shouldn’t pay as much for it as a house that has been thoroughly inspected!
If all the foregoing hasn’t been clear enough, if you’re a landlord, you need to be giving your tenants a break right now. However much personal financial angst you’re feeling, your tenants are feeling much more, and you need to do whatever is in your power to give them peace of mind that they’re going to have a safe place and roof over their head as they ride out the plague.
This is also a good opportunity to consider converting short-term AirBnB or VRBO rentals into actual housing. The logic of buying cheap properties and renting them at high nightly rates might have made sense when you were able to rent them at high nightly rates. Since that’s not going to be an option for the foreseeable future, you might consider simply renting them to long-term tenants at competitive rates. It’s not particularly sexy, but I don’t see anything sexy about owning a bunch of vacant apartments, either.