The COVID Lead Urban Exodus

The COVID Lead Urban Exodus is Creating Significant Opportunities for Property Tax Liens Investors

Several major trends are driving structural change in the US real estate market today: the lowest level of interest rates in history/affordability to upgrade; companies are adapting to remote work, and lower-cost cities’ unprecedented unemployment figures/enterprises going out of business. In short, businesses are decentralizing and moving to remote work practices, while families are relocating to lower-cost cities and rural areas. The impact is that major city prices are seeing price erosion while the smaller communities with good infrastructure are predicted to experience upward price pressure.

Suburbs and rural properties are benefiting from this major city exodus. More than half of the nation’s 100 largest metropolitan areas are seeing increased interest in the suburbs. This is not surprising since families are able to swap expensive major city real estate for more square footage in suburbs and rural areas.

In the short-term for tax lien investors,  holding a portfolio with vintage/pre-foreclosure liens for suburbs / rural residential properties would make a lot of sense now. As demand for such properties grows, even the hopeless vintage liens may finally pay off.

In cities like San Francisco and New York, rental prices are 20%-30% off their peak in the last few months. But the question is: Is this a short term COVID-19-related trend or the start of a structural shift? Perhaps for the next 2-3 years, as city businesses and their economic models need to change with a new normal, and demand will return.

In the long-term, the timing for tax lien investors to buy new primary liens for residential and commercial real estate in the cities has a lot of promise as these properties will most likely be highly sought after for 2-3 years again.

The overall assumption is that there will be a significant business migration and population shift to smaller cities with infrastructure driven principally by a lower cost structure. That, combined with a long term recession recovery, will result in sustained high unemployment levels, depressed urban property pricing, higher foreclosure rates, and an increase in late mortgage, tax, as well as utility payments. Consequently, this expands tax liens issued by revenue-strapped governments.

Property tax liens in the primary issuance market are predicted to grow from circa $8B in 2019 to upwards of $20B in 2021 with an accompanying increase in mandated interest rates, penalties, and foreclosures. This increase in supply combined with a long-lasting recession creates best market conditions for property tax liens: – i.e. larger selection of properties, better interest rates, a higher chance of foreclosures.

First signs of that can be seen in the upcoming tax lien primary market auctions – Maryland shows as much as 30% more properties this year, while Aug and Sep auctions for NJ have many high-end listings where the owners wouldn’t come close to the unpaid tax situation in any previous years.

In general, we have to keep in mind that after all property tax liens are still UNCORRELATED with the market conditions, and with lien-to-value (LTV) ratios as low as 5%, there is a lot of room to recover principal and interest in practically ANY market situation.