2008 vs 2020, Who Wins This Time?

Question

Let's talk about it. How is our situation in 2020 different from the 2008 crisis? What strategies worked then that will not work now; which ones will be just as successful?

Brian Burke · Answer

The biggest difference for us real estate investors is that 2008's crisis was caused by real estate.  This time, real estate's difficulties are being caused by our self-imposed closure of the economy (not arguing the merits of doing so, it's just a fact).

During the depth of the great financial collapse, the best real estate investment strategy was to buy foreclosed homes.  I was buying stuff in 2009 for lower prices than those same houses were selling for in 1985.  I know because I looked up the transaction history.  I managed to buy over 500 houses during that period in the San Francisco Bay Area and it was the opportunity of a lifetime.  But that opportunity is very unlikely to repeat this time around.

This time, if you want to buy half-priced real estate you'd probably have to turn to hotels and retail strip centers dominated by mom and pop small businesses.  The difference is this isn't as an easy of a road as buying foreclosed houses.  Hotels and retail are much harder to finance, will never be available in the same quantities, and will be a lot more difficult to manage through to recovery.  And then there is the question of what a recovery in those sectors really looks like, and how long it will take.  But if you have the wherewithal and a strong stomach...

I'm not too excited about the high-risk route this time around.  Instead, I'll keep buying multifamily, albeit at a more reasonable valuation than was possible last year and with eyes wide open that the income stream won't grow the way it likely would have if this all did not occur.  But job losses and financing challenges for homeowners and home buyers, plus people perhaps moving out of city centers in search of less density, might buoy suburban apartment demand and well-located properties could show some surprises to the upside.  We'll see.

Stephanie Simmons · Answer

I have been mulling this over for weeks.

Differences - evictions are being postponed.  Courts aren't open to rule on judgments.  So far there is still liquidity in the lending market (that may change).

Retail real estate demand is still here (in Florida anyway and a lot of other agents I have spoken to across many major markets - except NYC).  Retail supply is a problem - so I think this is what is maintaining current pricing levels in Central FL anyway.

Locally - investors are pulling back from new purchases.  I can tell because I am getting hounded by wholesalers and they are dropping prices within 5 days of first putting them out there.

So far - residential contractors are still very busy; however large commercial construction companies are laying off middle management and cutting pay of higher level employees.

If we keep cutting off large sectors of the economy (elective medical procedures - all food service workers, hair dressers, schools, event/promotion industries) for another 4 weeks - you will see a super cascade effect in the economy that could be where we have 30%+ unemployment.  If that happens it will be way worse than 2008.

Hopefully we can have some common sense re-opening and allow businesses to figure out a way that they can operate in a safer way.  We go into a grocery store with a bunch of people but my hairdresser cannot cut my hair in the parking lot of her salon that she owns  It's silly.

Justin Thorpe · Answer

@Scott Beal

Too bad everyone is comparing an apple (2008) and an orange (2020). There was NO pandemic in 2008.  There is NO mortgage crisis in 2020. 2008 was a liquidity crush’s which was resolved via QE and Fed actions. This time around the government had already pumped in 3 Trillion to stave off any liquidity issues.  Better to go deeper into history and study economic trends in 1920 or 1957 to draw parallels if any. Maybe even look at how life came back after massive natural calamities like the Japanese Tsunami or Hurricane Katrina or how lower Manhattan rolled after 9-11 even better how life worked post SARS although we in the US remained largely unimpacted. At the very least to think there will be homes selling for 50 cents on the dollar in 2020 because they did in 2008 won’t apply.

Taylor L. · Answer

I'm not sure how long term it'll be. I think it'll be fast. Capital One is based in my city and they're going to have office employees work from home until at least September. Corporate America is seeing that they don't need these enormous office spaces and I think they'll learn that lesson fast.

Office leases are much longer than residential, but I see this change taking hold fairly immediately. I know of other companies that have trashed plans to build big new office buildings because they see they don't need nearly as much space as they thought.

I'm also hopeful for this outcome because I think it is for the better. I always hated fluorescent lights and cubicles when I worked in an office. My hope is that they go away so others don't have to suffer under them!

Chris Martin · Answer

Some residential REITs are off 50%. BRG is an example, and it has nothing to do with collections. At about 97%, collections are not far from pre-pandemic rates. If you were to buy the whole company, you'd get 53 good quality apartments at $9,279 a 'door' net, per market capitalization. Many unfortunate commercial REITs will potentially end up in bankruptcy because their business models can' t survive the trump flu.

As stated in earlier posts, this is not a recession driven by a real estate or financing crisis.

So, 2008 and 2020 are not the same animal from a real estate perspective.

Stephanie Simmons · Answer

@Scott Beal

I’m under an NDA on one now. My partner and I will probably make an offer in a couple of weeks.

Harsh R. · Answer

I'm a fan of well put together real estate research reports and Zillow put this out a couple days ago, if anyone is interested -

https://www.cnbc.com/2020/05/04/coronavirus-will-shrink-us-home-prices-by-2-3percent-nationally-zillow-forecasts-but-deeper-dive-could-be-in-store.html

Scott Beal · Answer

I think @Brian Burke is on the right track here. I don't see a complete reversal in the trend towards density in residential real estate. It still makes sense for every other reason. The McMansion was a failed experiment, even if it did last 50 years. Some people will always want that lifestyle but the majority of people do not. We are very social creatures and much of our well being is dependent on contact with our communities.

The major difference here is that the recession in 2008 was caused players within the real estate sphere. There was a lot of fear surrounding real estate and in 2020, that fear is mostly placed elsewhere. While the current administration doesn't seem to care much about protecting human life, they do care very much about protecting the economy and have taken rapid, dramatic action to do so.

I am also with @Raju Balakrishnan, this event is going have a much larger effect on other industries and you are seeing that already.

Eric Johnson · Answer

No big real estate value crash will happen, but there will be many more opportunities for investors to pick up off market deals, due to COVID reasons. In this market there are many reasons why someone may want to sell. We will see a slight dip in values 1-3% probably, but after COVID it will be about a year or so climb back up to where we were. Will be interesting to see it materialize.

Andy Nathan · Answer

@Scott Beal remote working will be a bigger, long-term shift. As more people work from home, people will want larger places to have a home office. We might see an increase in SFRs and a decrease in lofts and 1-units. It could be the end of the tiny home movement. Never underestimate  Americans desire to super size.

2008 vs 2020, Who Wins This Time?

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