Now that we’re two months into the global pandemic, it’s time to turn our focus to *buying* items at a discount. Notice, we’ve used the word “items” since you may be interested in purchasing things that will depreciate in value (such as a car) which acts a lot more like a liability than an asset (IE. vast majority go down in value over time). The last couple of months we’ve spent more time focused on keeping cash flows up. The past two months were critical as you were hit with a golden opportunity to not only make more money through online revenues but keep costs at near zero since everything was shut down anyway. Now, we’re in step 1 of the transition phase: purchasing all the stuff you need and even the stuff you want.
Cars (1-2 months): You probably don’t need one… but if you do? It is time to start researching. Again. This assumes you need one and this will not be the case for many people who read this blog. The reason is pretty obvious… many Americans will purchase a new car with debt. If the car was purchased with debt and the person is laid off, this is one of the first things that will go. You’ll see the same thing happen to homes as well.
More importantly, many Americans own two cars (sometimes more). With unemployment at 20%+ in the United States, the chances that both a mother and father are employed is on the decline. It’s a sad state and it is also realistic to assume that many of these households will be forced to sell a car (or both). The potential “offset” is more people living away from a city center (driving up car demand). That said, we’d bet that work from home adjustments would structurally decrease commuting anyway (IE. cars sales will be down). Looking at the automotive SAAR data, -20% is the initial starting point in terms of car sales.
With the grim part out of the way lets look at a simple step by step to finding the right places with the right deals: 1) first find the area with the worst credit rating. You can simply google and find the states with low credit ratings and that is typically a good starting point for where the pain begins. Low credit rating is a simple filter for inability to pay debt. 2) after this we enter “more art than science” as you target the city within that particular state that has a more “materialistic feel to it”. An obvious example would be Los Angeles in California and Miami in Florida. Generally speaking, nicer cars are purchased so other people look and say “oh man that guy is rich look at him!”. High-end car sales are not about performance, they are bought for attention. The performance aspect is just a way to justify the purchase without looking insecure. As we’ve said millions of times, if you can target an insecurity (looks – weightloss for example) you’re going to get rich in a hurry. And. 3) the last item to flush out is the inventory situation. You want to find the car (in that particular area) that is overbought and popular. Every city has its own culture. That said, each city usually has a type of luxury car that is common. You want to focus on that one as the common luxury car has the highest number of defaults (of course!). There is no doubt in our minds that some luxury sales will actually go up and certain specific cars won’t be on sale due to limited supply (Also… the person who bought the unique items are more likely to be rich and not debt loaded).
This wouldn’t be a WSPs blog post without exact cars in the text. So we’d suggest going for cars with a typical $80-100K price tag (real luxury but not quite the lambos/Ferraris). The 911 Porsche is a good starting point. These will likely see the steepest discounts when the real white collar layoffs begin. The second area we’d look? The classic “i’m over spending for my middle class income” – this usually results in mustangs, BMWs and corvettes.
Quick pause. We realize the writing above was more run-on than usual. This is due to excitement so you should really look into these cars in about a month or two!
Homes (3-5 months): It is still early. While more and more homes are entering into forbearance, the real estate game is a “long unwind”. It takes about 120 days before the home is taken away from someone (as usual there are ways to delay the inevitable, but, we like to keep things simple around here). If we take a look at the timeline, the first month of pain was really March and then April. So we know the deals won’t really show up in the first two months. People are busy trying to get their personal lives in order, calculating what they can and cannot keep… so on and so forth. Combine this with unemployment benefits (higher than usual) and a $1,200 stimulus check for many and you get some extra time.
As a rough estimate this would put us out into around August/September. Why? Well we can assume that the unemployment benefits + some savings (hopefully) and stimulus will lead to a delay in many foreclosures. The above is not meant to be an exact figure but more of an estimate. Highly unlikely that it is an exact 120 days from the beginning of the pandemic and it is also unlikely that unemployment benefits help a lot of people after 6 months or so (don’t forget, these benefits also go away eventually).
With the rough timeline out of the way, you now have to decide on your real estate strategy. You either 1) buy your own place in a centrally located area you love or 2) you decide to target rental properties. This seems obvious but the strategies are completely different. If you’re looking to buy your own place, this is likely a *bigger* gamble. Why? Well, the world is going to change and you have to correctly choose the right cities to live in.
For fun, we’d bet on the major cities with good weather beating out the ones with bad weather. A simple filter, sure, but it also makes sense from a logical perspective. If people begin to work remotely and commuting becomes less common, then the value of weather goes up. Who wants to live in a major city with terrible weather and a declining population? Sounds like a Gothem type scenario. The second idea is clearer, find the levered up states (just google search credit scores by city… again) and you’ll get a good starting point. This usually leads you to middle class areas that are seeing significant wage compression.
Both strategies have a high chance of working and you’ve got an approximate 6-9 month window to strike. That’s a rough estimate and it could be a bit longer (12-months) but unlikely lasts much longer than that. So assume that by September of 2020 to September of 2021 there will be an “official bottom”. No one times the exact bottom and no one times the exact top so don’t beat yourself up over that. Instead, you should look at the *rate of recovery* of the city you bought in. If you go down the single purchase track (you’re buying your own place)… you better be right since the amount of money you’re putting up is likely higher. If you choose the rental track, you have a little bit more diversity since you’re probably buying 2-3 of them in various areas (areas being defined by type of person the market targets in a particular state/city).
Now for the fun part, we’d be looking at the following places: Summerlin/Vegas (Nevada), Dallas/Austin (Texas), Denver (Colorado), Los Angeles (California) and New York City (New York). As you can see the strategies are completely different. Also, you should assume that the major cities (LA, NYC) will see a bottom *later* than the tier 2 cities. Why? The major cities typically have more rich people that will strike first and fast since they’re less worried about near-term returns. This keeps the supply off the market for the short term. The tier 2 cities will likely see faster action (people have less cash/liquid savings) and move to nearby suburbs from the major city. For example, if people usually live in Dallas/Austin, they will move 10 miles out or so (lower the cost) and vacancies pick up in the city center. So there you have it, high level strategy along with exact areas of interest.
Commercial Real Estate (6-12 months): Here is where the big money is. The problem? There is no way to earn big time money without big risks. That’s how life works. Commercial real estate is going to feel some extreme amounts of pain. Twitter already stated that their employees can work from home “forever”.
Going forward, more and more companies are going to look at their workforce and realize that 10% were doing a ton of work and 20% were doing practically nothing and some of them don’t even need to be employed anymore (IE. who needs a conference organizer if conferences are illegal?). Without mass gatherings for what appears to be a year or longer… you’ll see a large reduction in the need for commercial spaces. Why? Well less jobs = less foot traffic at the city = less revenue for people with leases (coffee shops, sandwich shops etc.) = unable to pay rent = vacant spaces = default since the building had leverage. Hopefully the prior sentence was clear but if not, follow the flow of money in your own city and it should be quite clear.
Why is this going to take a while? Good old corporate politics! No one wants to be the first Company to fire people during a global pandemic. Doesn’t look good (you know PR stuff). Also? This allows the big players to drive the smaller players out of business. If you can survive a 2-year downturn, then you try to make your competitors do the same thing. They bleed and bleed and bleed until they go under.
Fast forward a bit and this would result in head count reductions when the market begins to open up. No reason to have those small satellite offices when you can simply log into a computer at home. These positions won’t be “layoffs” they will be redundancies where the position is no longer available in the future. Software will take over the VAST majority of all tasks. At this point, a savvy young entrepreneur can create businesses making millions in profits with only one person and a few outsourced items (software does all the basic tasks).
Most of our readers are sharp so they have already figured out what areas will be hit the most: cities with heavy technology exposure. San Francisco/San Jose are likely impacted. Texas and Nevada are hit due to oil and casinos going down. And. Miami will likely take a big hit due to large declines in hospitality.
The most compelling, again our own guess, is a tech focused city like San Francisco, San Jose, Austin, Boston and Seattle. Those cities generally have more tech jobs (we’re sure we missed a few) and will be the most open to a work from home environment.
Taking another pause… yes we realize we’re taking an opposite stance from Google. We’ve been wrong about things in the past but our guess is that the team at Google is talking their own book. They bought a lot of real estate recently and likely don’t want to see the value collapse. We have no idea how “social distancing” will work in an office. All of the sinks, kitchens, elevators etc. are going to be shared anyway. Perhaps we’re missing something but it just doesn’t seem efficient or effective at all to have 6-10 feet distancing within the same floor or building if all the items are being touched by 10-100+ people (door knobs being obvious examples).
To wrap this up, you have to wait quite a while for these deals to become attractive. Two clear reasons: 1) companies can hold on for a lot longer than a levered up individual and 2) you have to be extremely careful about what you’re buying. These projects cost large amounts of money and can have a large number of investors as well.
Rare Collectables (6-12 months): Right now, Michael Jordan rookie cards are selling well due to the “Last Dance”. This isn’t surprising as he has a massive brand and following. While we wouldn’t recommend buying those during a hype period, you should take a look at collectables in about 6-12 months. People will begin to sell them to shore up some cash. This is already occurring with rare art collections. We’re not sure if any of our readers are interested in these things (could be a waste of time) but it’s an area worth exploring. In a worst case scenario, you can buy a few items that are likely to go up in value long-term and then liquidate once the economy is in a stable condition.
For those with limited knowledge of a particular collectable (comic books, stamps, rare coins, paintings etc.)… We’d go ahead and choose one that has been around for more than 30 years or so. This will decrease the likelihood of choosing the wrong area of focus. For fun, you’d be shocked at how much money people pay for rare comics. In fact, this might be a good area to start as you’re less likely to be emotionally attached to them and can flip them for a profit.
Find the high quality items that have appreciated consistently over long periods of time and purchase those items in 6-12 months when individuals panic sell them (yes it will happen, even for obscure collectables like comics and stamps).
For fun we’ll go ahead and recommend the items that have lasted quite a bit of time. We’d look at rare coins, rare baseball cards, rare stamps and rare comics. That gives a different strategy for everyone and choose the one you care the least about (no emotional attachment). If you get attached to it, you won’t sell it on the rebound.
Final Shopping List Items: Now for the funny money stuff. If you’re just looking to get good deals on some stuff you’ve wanted we’d look at all companies with heavy retail/commercial leases in place. This is not a fun task. Go through 10-K filings for major public companies in retail for example. Then find the ones with a lot of real estate. These companies will be the most desperate, most likely to go under and most likely to have significant discounts. You can repeat this for any item you’re looking to *consume*. The key word here is consume. If you need new suits, go through the financials of your favorite brands and you’ll know which website to track. If you’re looking for used cars, keep track of those resale market postings and rental companies going out of business. If you’re looking to upgrade your apartment or home, track all the appliance companies and construction companies that are hurting. They will all give you the best deal since they’ll need the cash flow.
