Towards the end of 2019, there were rumblings in the financial community of an impending recession in 2020.
The economy had been expanding for more than ten years – longer than any expansion in history – so recession was only a matter of when not if. Fast forward to today, and the markets are in a panic. In only a month, the Dow has dropped more than 20%.
The downturn that had been predicted is now on our doorsteps, but it’s not for the reasons initially suspected. It’s being caused by something wholly unpredicted – the coronavirus, a virus that originated in Wuhan China and has quickly spread around the world.
The coronavirus has crippled travel and shut down the government, business, entertainment, and sporting events of all types. The social and economic impact can already be felt on our shores and is expected to get worse.
So in this recessionary climate, where can investors turn to find shelter from the oncoming storm?
While industries of all types from travel & tourism to retail, hospitality, entertainment, sports, and tech reel from coronavirus panic, there is one segment built to not only withstand a downturn but to thrive in one. That segment is affordable housing.
To see the resilience of affordable housing, look no further than the last Financial Crisis. While real estate values fell across the board, starting in 2008, affordable housing stood firm as people who lost jobs and homes turned to affordable housing to cut expenses.
Even as the housing market has made a complete recovery from 2008 with real estate prices now exceeding pre-crisis numbers, an interesting phenomenon has occurred with affordable housing. Demand affordable has steadily outstripped supply since the crisis.
Now, with the ever-widening gap between supply and demand, the availability of affordable housing has reached crisis levels in many markets.
According to Attom Data Solutions 2019 rental affordability survey, renting a home is more affordable than buying in 59% of the country. This is mainly due to housing prices outpacing income growth.
There are several other factors behind the booming demand for affordable housing, even as the economy has rebounded.
One of the most significant factors is the fact that we’re becoming a renter nation with the demand for affordable housing leading the pack.
Here are some telling statistics:
- Nearlytwo-thirds of renters nationwide say they can’t afford to buy a home, and saving for a down payment will not happen any time soon.
- The NLIHC also found that the US needs more than 7 million affordable homes to meet the current housing demand for the nation’s more than 11 million extremely low-income families.
- According to a Harvard report, nearly half of renters were cost-burdened, meaning they spend 30 percent or more of their income on rent.
- New development of affordable housing is impeded by local planning boards plagued by the “not in my backyard,” or “NIMBY” attitude, favoring mid-level and high-end development projects to preserve local real estate values.
Adding to the problem of the affordable housing crisis is the pent up demand for affordable housing by Baby Boomers. This is due to many looking to downsize to ensure adequate funds to last their entire retirements or to have funds to enjoy more activities.
Here are some of the statistics driving Baby Boomer’s demand for affordable housing:
- 40% of all Baby Boomers (approximately 30 million) are set to retire in the next five years.
- 24% have no savings.
- Less than 30% are on track for retirement.
- Roughly 50% will live off social security exclusively.
It’s not just Baby Boomers driving demand for affordable housing, Millennials and immigrants are also putting pressure on affordable housing supply.
Burdened with student loans and with home prices far outpacing wages, many Millennials can’t afford to buy their first home, with many falling within the affordable housing demographic.
Savvy investors have long turned to commercial real estate as a source of cash flow and long-term appreciation that is insulated from recessions.
There are certain segments more correlated to the broader economy than others, but affordable housing has proven to be negatively correlated to downturns.
Retail and office properties tend to get hit the worst during economic downturns as consumers cut back spending on products and services.
The one thing people don’t cut back on is housing since shelter is a basic necessity.
Although people still need shelter in a downturn, the one adjustment they make to their living situations is to downsize to more affordable housing to ride out the storm.
During the Financial Crisis and its aftermath, while single-family housing values plummeted, the one segment that thrived was affordable housing, including apartments and mobile homes thrived.
In today’s turbulent market, affordable housing is the one sure almost guaranteed to provide investors with a steady income stream with the potential for growth – even in a time of turmoil.
Moreover, unlike the stock market where you can lose your entire investment, it’s nearly impossible that the value of an underlying commercial real estate asset is completely wiped out.
One can argue that there has never been a better time to invest in affordable housing – even compared to conditions during the financial crisis.
That’s because the gap between demand and supply is now greater than any other time in our history, with the situation only predicted to get worse in the foreseeable future as any onboarding supply will be inadequate to meet unprecedented demand.
So while the broader markets nosedive, taking investors’ portfolios with them, an investment in affordable housing would be a reliable shelter from the financial storm.