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America already had a financial health crisis, then came COVID-19

Many families in America were already struggling with rising costs and stagnant wages, well before we engaged in a war against coronavirus.  Now, just a few months into 2020, millions of Americans have lost their jobs due to the coronavirus outbreak, and the worst of the damage is yet to come. According to a Federal Reserve analysis, nearly 67 million Americans are working in jobs that are at high risk for layoffs. Current projections show that the coronavirus economic freeze could cost 47 million jobs and send the unemployment rate past 32%. To put this into perspective, this would top the Great Depression unemployment peak of 24.9%.

Furthermore, it is unlikely that life will return to normal any time soon. Research from Harvard University’s T.H. Chan School of Public Health warns that intermittent periods of social distancing may need to persist into 2022. In recent interviews and opinion pieces, pandemic prophet Bill Gates corroborated the grim news. Gates said that only the development of a vaccine AND the ability to manufacture billions of doses would allow us to return to the way things were before the emergence of the virus. Based on past vaccine development records, our best hope for developing a COVID-19 vaccine will take about 18 months, Gates said.

“We have moved to a recession that will be worse than the one we experienced in 2008”

Amina J. Mohammed, UN Deputy-Secretary-General 

The rising risk of tenant default 

The risk of tenant default is skyrocketing. Many families in America that rent fall in the bottom half of the wealth distribution — the population most impacted by the current health crisis. Tenants are becoming more and more financially squeezed, and this increases the likelihood that they will default on their rent payments. 

Even before the coronavirus outbreak, it was apparent that many families were struggling financially. These facts, published by the Joint Center for Housing Studies of Harvard University, support this notion:

  • In 2019, the median monthly rental costs were up 15% from 2000.
  • At the same time, the median renter household income fell sharply.
  • Two-thirds of all renter households (30.5 million) were in the bottom half of the income distribution (below the US median household income).
  • Average renter households had very little savings and wealth.  The median net worth of households was only $5,000, and they had on average $800 cash savings.

Impact on you, the property owner 

Property owners are also struggling. They are not immune to the impact of historic rising costs and stagnant wages, nor are they safe from the coronavirus economic freeze.

If a tenant stops paying rent, the expenses keep piling up. They do not disappear. According to the National Apartment Association, 91 cents of every $1 of rent collected goes to the mortgage, taxes, property improvements, and other expenses.

Many landlords also have day jobs they depend on. If that income is impacted (eg. unemployment due to coronavirus), they have to find an alternative way to cover their costs.

The amount of debt the typical American household carries was the major contributor to the financial health crisis in America before we had to deal with a global epidemic. According to the U.S. Census Bureau, the median household income is $61,372, but the typical American household has an average debt of $137,063.

Like other Americans, property owners might have an increasing need to access cash during these uncertain times. Many might go further into debt (if they can find a borrower willing to lend them money during this period of contraction), as the government stimulus will not be sufficient. This need for cash will worsen the mounting debt issues many property owners already face.

Conclusion

The coronavirus economic freeze has significantly worsened the financial challenges many Americans were already facing. We are also potentially more than 18 months away from having a vaccine, which could require intermittent periods of social distancing to persist into 2022.

Because of these economic uncertainties and the extended timeline, property owners have to:

  • Look for ways to safeguard their rental income. The risk of tenant default is skyrocketing.
  • Be smart about how they access the cash they might need to cover their costs. Traditional short-term debt options like personal loans and credit cards are risky and expensive. There are safer and cheaper alternatives available.