04/01/2020 |
Analyzing the Real Estate Market Today vs. 2008
In this new blog post, author Howie Bick takes a look at the housing market in 2008 vs. today’s crisis with the current Coronavirus pandemic. He also looks at the SPY and how the two time periods compare. This is a great read!
Analyzing the Real Estate Market Today vs. 2008
The Coronavirus has inserted itself as one of the most impactful economic events in the last 20 years. People have been comparing it to the 2008 recession, 9/11, and many other historic economic declines. The markets have felt tremendous effects, as consumers have stopped
purchasing, the economy has stopped cycling, and business has come to a halt. The flow of money has gone fully digital, with consumers purchasing from online-based companies, rather than the brick and mortar shops. Companies have seen their stock prices decline anywhere
from 20% to 60%, in a matter of a few weeks. Early February the stock market was at all-time highs, and in March, the market had declined by all-time low percentages.
The S&P 500 has seen incredible swings to the upside and to the downside, as lawmakers have tried to create various solutions to help solve the current pandemic we’re experiencing. We wanted to compare the way the markets have responded today, the S&P 500 index and the FRI, the REIT index, compared to the times of 2008.
The Real Estate Market Today vs. 2008
The Real Estate Market in 2008, took a turn for the worst. It was the leading cause behind the economic decline, with banks’ lending at incredibly high leverage points, lending to poorly qualified purchasers, and then taking bets against the at the time, strong housing market. The financial institutions behind the economy had made a large bet on the housing market and it ended up going down the drains. Those same financial institutions had to be bailed out by the government, in order to keep the economy running and to keep markets somewhat solvent.
In today’s time, 2020, the economy is in a similar downward trajectory, but this time, the leading or driving cause is the pandemic of the coronavirus. The coronavirus has shut down the world’s economy and sent everyone into a form of quarantine or self-isolation. Commerce has been shut down, everyday activities have become very limited, and a lot of business has come to a halt.
The Real Estate market today is a bit different than it was back in 2008. In 2008, it was tough to find financing or any institution to lend on real estate. Today, it’s now incredibly difficult to find any buyers for prospective purchases. The landlords and lenders are unsure of how tenants are going to be able to pay their rents with incredibly high unemployment and a nationwide economic shutdown. Making it increasingly more difficult for landlords to pay their mortgages.
The chain of money has been cut off to a certain extent. The money flows from business owner to employee, to landlord, and to the mortgagor. That’s the way the money has flowed within Real Estate, and in the more common times than we find ourselves in today. As the business owner has seen a major decline or halt in business, its resulted in measures to cut costs. Whether that means letting people go, or asking for deductions in salaries, or even not being able to pay the salaries of its employees without its operations up and running.
There’s a lot of uncertainty surrounding what’s going to happen. Making it incredibly difficult to find people who are interested on both sides of the table to transact under these types of uncertainty.
There are lots of questions being asked like, Is the federal government going to halt mortgage payments on behalf of landlords? Are tenants who are not paying rent going to be evicted? Are the bonds purchased on behalf of performing loans not going to be paid? There’s a lot of
interconnection between real estate, finance, and the economy, and a lot of questions that need to be answered.
The S&P 500
The SPY (the index of the S&P 500), went from $322.18 at its peak in February of 2020, down to $247.58 in March of 2020. The major decline in values within one month, has been historic. The 23.1% decline has been recording breaking, within a one-month time frame. To give you context, the economic recession of 2008, saw the SPY decline from 153.55 in May of 2007 to 73.44 in February 2009 at its lows. The 52.2% decrease then, was spread out over the course over the course of 22 months. That’s an average decline of roughly 2.5% per month of decline. Today, because of the Coronavirus, the markets have declined 23.1% in one single month.
The REIT Index
The FRI has declined in a similar fashion that the S&P 500 has. From a high of $26.45 in February of 2020, down to $18.46 in March of 2020. The decline the FRI has experienced in 2020 has been roughly 30%. During 2008, the FRI declined from $20.18, down to $6.13,
resulting in a decline of more than 69.6%. Compared to today’s decline, its roughly two times as worse. A lot of the reason behind the steeper decline in 2008, was the leading cause of the recession was driven by Real Estate, while today it’s been driven by a global pandemic.
REIT Index vs. S&P 500 Index
The two indexes, one measuring the overall market, and the other measuring the moves in the Real Estate market, are interesting to compare against one another. In 2008, a lot of the declines were centered around Real Estate, causing Real Estate stocks and companies to nosedive. Investors, and financial institutions alike, were not considering investing into anything that involved Real Estate. The asset class was seen as an almost no-fly zone, as people were incredibly scared and scarred from the fallout of the recession. Today, the market has declined similarly, but this time, Real Estate is not the driving cause. It’s interesting to see, that when compared to 2008, the decline today in REITs, seems minor, and on a much lesser scale.
Considering the SPY is composed of many different industries, and many different companies, it’s held pretty well in comparison, at a 7% difference in more of a decline. In 2008, the difference in declines between the two was roughly 17%, more than double what is today. The REIT market will definitely be affected by fewer companies and businesses looking to lease or rent office space, as the world has emigrated to online and digital platforms. Real Estate is definitely going to be an interesting, and tricky business arena going forward, as there are many uncertainties and ambiguities that have yet to be figured out.
In the Real Estate Marketplace
Within the weeds of the real estate market, much like every other business in the world today, it’s come to a halt. There aren’t any deals really happening, as no one knows what’s going to happen in response to many of the questions above. Back in 2008, the market came to a halt because of mistakes in operating, today it comes to a halt because of uncertainty created by the coronavirus pandemic.
Buyers and sellers have no idea what’s going to happen; if their tenants are going to pay rent, whether their real estate taxes are going to stay at the levels they’re at. Projecting cash flow or income has become incredibly difficult, as no one has an idea of how much rent tenants are going to pay, what commercial tenants are going to do, and the type of income a building is going to produce. As a property’s income goes, so does its value. With all the uncertainty surrounding real estate, it’s incredibly difficult to transact within the marketplace.
What to expect from real estate going forward?
It’s tough to predict what’s going to happen with the real estate market, as there are lots of questions to be answered, and situations to be resolved. The real estate market now is going to see a decline in transaction volumes, as people are unsure of what the future has in store. Buyers are going to be a bit more hesitant to buy and attracted to dry powder or the capital they already possess. Some of the bigger players who have lots of capital and are ready to deploy might be very active and look for opportunities. Some sellers will find themselves wanting to sell and get out of properties, while others might try and hold through this period of uncertainty. The marketplace is definitely going to be more stagnant than it once was, meaning Real Estate values will probably tend to decline a bit, due to its supply and demand-based structure, and illiquidity in the marketplace.
Closing deals is going to become tougher and more difficult. Real Estate analysts will see themselves modeling and projecting minimal to no future rent growth. Trying to figure out how to understand if there’s going to be a delay in mortgage payments, a reduction in taxes, or the financial effects of tenants possibly not paying their taxes, as well as some areas instituting a rent freeze.
It’s going to be a sign of strength if you’re able to maintain the status quo and maintain the property you own. With income declining, and fewer people making money, there’s a good chance that real estate values and the market take a hit.
Rent Growth is something that is going to be a difficult thing to come by. Raising rents or increasing the amount a tenant pays is going to be difficult as more and more tenants lose their job or see reductions in income. A lot of landlords have projected into their models and financial analysis rises in rents over the coming years, which will most likely evaporate.
Conclusion
In 2008, Real Estate was one of the primary factors behind the downfall of the world’s economy. A lot of the reasons had to do with aggressive investing, over-leveraged financing, and faulty mortgages. The institutions behind the investments had to be bailed out by the federal government. The economy went into despair, and so did the Real Estate market nationwide.
The Real Estate market is now in question as well. With uncertainties surrounding what is the Real Estate market going to look like after the economic shutdown? How does the Real Estate market today, compared to the Real Estate market in 2008? And what should we expect from the Real Estate market going forward?
Fast forward to today, it’s 2020, and the economy is in a downward progression, similar to the one we experienced in 2008. Instead of Real Estate driving the economy’s decline, now it’s the global pandemic of the Coronavirus. The world has shut down, and the economy has followed suit. The world has gone into a state of isolation, predicated on self-distancing, with limited interactions. Everyone, for the most part, is being advised to stay home, unless essential activities like banking, food shopping, and hospitals are critically necessary.
Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, he was a financial analyst.
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