Mike McMullen is the CEO of Prominence Homes and the author of Build. Rent. Sell. Repeat!
News outlets have thrown around the word tsunami recently to describe a potential wave of evictions hitting the rental markets in January. It’s starting to make some housing investors anxious. Whether it’s referred to as an eviction threat or an eviction crisis, is it coming in the near future? Perhaps. But standing amidst a flood of alarming headlines can make it hard to decipher facts from fears. Let’s look at what we know and — more importantly — what we don’t.
The prediction of an eviction tsunami is built on simple logic: Millions of tenants are behind on their rent. These same tenants have been kept in their homes by the CDC’s housing moratorium. They will have to pay their bills in January and will likely be unable to afford the backlog of expenses. Landlords will therefore be forced to file for a wave of eviction, causing a tumult of homelessness and financial destruction.
It sounds dire — and some of the gloomy predictions are built on facts.
The pandemic and ensuing shutdown wrecked bank accounts across the country. In the month of October, a little over 32% of Americans claimed that they would have difficulty paying their usual expenses and the number of Americans renting today has steadily increased to a high in 2019.
Some economists look at these statistics and start to get queasy. And from one perspective, the water is rising and the boat has sprung a leak. But before jumping ship, wary investors should consider all sides of the issue.
The Tide Pool
Dire predictions frequently fail to address all the questions. The predictions of an eviction tsunami are no different.
Doomsayers should use caveats to craft a more responsible metaphor. If the coming crisis resembled a tsunami, it would entail uncontrolled devastation — one massive wave of destruction. But this won’t be the case. Many courts cannot process a surge of eviction filings because they are already backed up. Legal proceedings could take months, and new moratoriums will further slow the process.
Market analysts should instead expect to see scattered financial squall lines around the country. The storms will be gradual and fragmented, striking the market in different locales with varying force. Landlords on the West Coast and in the Northeast can expect to see difficult storms. Several states in these areas enforced shutdowns leading to impacts on jobs and other ripple effects in the economy. By contrast, the Southeast will likely have a completely different experience, with the majority of respondents to the Fed’s survey in April noting sales at a flat level — as compared to a decline in many areas. I have seen personally high rates of rent collection in a Southeastern property management company I own over the last several months.
It should be added that though rent has climbed drastically in the last decade, more is at play than financial insecurity. The share of Americans who are renting continues to rise, including the percentage of adults 35 and older — a demographic more likely to be economically stable than that of renters under 35.
Shoring Up The Levees
In the end, I believe it will be up to individual Americans — not policymakers — to solve the coming economic puzzle. No matter where someone stands economically, if they participate in the rental market then they should expect to play their part. Renters who are behind on rent need to start thinking practically about their finances. If the numbers don’t add up, they should enter negotiations with their landlords sooner rather than later. Likewise, landlords should be willing to work with their tenants if for no other reason than empty units are bad for revenue.
It cannot be denied that the industry is facing a potential thunderstorm, but the market will always survive and resurface. A good real estate investor will not assume that everyone is drowning and throw up their hands. They will instead tread water, make shrewd decisions and wait on the waves to recede.