Everywhere you turn, all you see, hear and read about is doom and gloom in the economy. Invariably dragged into the predictions of recession and downturns is the state of the real estate market.
Here are some recent headlines:
“Economist Who Called 2008 Housing Bubble Warns of Home-Price Declines.” –Businessinsider.com.
“A Housing Market Crash Could Hit These 20 Cities the Hardest.” –Newsweek.com.
“Keep an eye on these ‘overvalued’ housing markets as the housing boom implodes.” –Fortune.com.
“Next Housing Market Crisis, Price Crash Could Be Caused by Too Many Homes.” –Businessinsider.com.
The media’s generalization of the health of the entire real estate market as a reflection of the whole economy is lazy reporting.
The problem is that the media only focuses on one or two sectors of the real estate class and extrapolates this to generalize about all sectors. And the one sector they focus on is residential real estate, with the single metric, they rely on being housing starts. This shouldn’t be surprising since housing starts is considered one of the major economic indicators for assessing the economy’s health.
These significant economic indicators revolve around the individual consumer and consumption but don’t adequately assess the entire real estate class.
Here are those major indicators:
- Real GDP (for measuring economic growth. Official recession with two straight quarters of declines).
- Consumer Price Index (for measuring consumer inflation).
- Producer Price Index (for measuring supply-side inflation).
- Housing Starts.
- Manufacturing And Trade Inventories and Sales.
- Consumer Confidence Survey.
- Current Employment Statistics.
- Retail Trade Sales And Food Services Sales.
- S&P 500 Stock Index (stock market performance).
Housing starts are only one metric of the real estate market and only reflect new home construction. Technically, housing starts reflect the number of privately owned new houses on which residential construction (i.e., single-family houses, townhouses, small condos, or multifamily apartment buildings with five or more units).
Here’s the problem with media generalizations: It doesn’t consider the performance of individual sectors that may or may not be affected in the same way by economic factors.
Take the pandemic, for example. At the onset of the COVID-19 pandemic and lockdown-induced recession, most real estate sectors – residential and commercial sectors took a hit. However, some sectors proved more resilient than others. Industrial saw gains because of the spike in demand for warehouse space to accommodate the boom in online ordering. Affordable housing in the multifamily segment also proved resilient – with minimal dips in occupancies and delinquencies that plagued Class A properties.
Even when commercial real estate (CRE) is brushed into the mix of a real estate decline discussion, it’s usually only three specifically targeted sectors:
- Office.
- Retail.
- Hospitality.
That’s because these sectors are highly correlated with the overall economy. Both the Financial Crisis and the pandemic proved that all three sectors saw declines with the rest of the economy.
The sector most likely to survive the crash is lost in the discussion of an impending real-estate crash – affordable housing. Why? Because it’s unsexy? While the media gets it wrong, one segment of investors doesn’t get it wrong – ultra-wealthy investors.
The wealthy have been investing in affordable housing for years, and many are either standing firm with their current holdings in the sector or expanding their portfolios faced with the prospect of recession. That’s because this sector delivers stability and consistency in times of both prosperity and economic uncertainty and in times of price stability and inflation. Resident retention rates are also consistently high, with rents able to keep pace, providing a steady source of rental income for investors. So, while investors run away from other real estate sectors, savvy investors double down on affordable housing.
You never hear about the state of the affordable housing sector or other real estate sectors like storage facilities or assisted living because those segments are less correlated to the overall market. Bucking the trend, affordable housing and storage thrived during the Financial Crisis and were built to weather oncoming storms. Boomers aren’t getting any younger in the senior housing space, and millions are expected to retire in the coming years.
Unfortunately, CRE sectors such as affordable housing and other cash-flowing real estate segments like senior housing and storage are rarely discussed in the news, along with the general predictions of gloom and doom in the real estate market. I guess it doesn’t attract eyeballs and clicks.
While many mainstream investors are deprived of accurate reporting and may miss out on opportunities to invest in these non-correlated segments, savvy investors know better. They hold these assets in their portfolio precisely to protect against the disasters the media predicts.
The media is wrong about the real estate market as a whole. It may be right about one or two segments but not all – and certainly not the segments designed to protect against wage loss and rising prices.
These segments should be touted as recession and inflation busters and not be grouped in with every other sector correlated to the broader economy.
