When the federal government came to a screeching halt on Oct. 1, the government shutdown left ugly marks on the real estate industry, particularly rental markets. States like Florida, Delaware, Arizona, Hawaii, and Nevada rely heavily on real estate as the lifeblood of their local economies.
The shutdown began when Congress failed to pass a funding bill, forcing federal agencies to partially close, which has decimated the operation of housing programs that rely on them. With the shutdown now surpassing the two-week mark, essential functions such as loan processing by the FHA, VA, and USDA have slowed down significantly or paused, meaning housing transactions that rely on funding from these agencies cannot go through.
“Real Estate Accounts for 20% of the U.S. Economy”
“Real estate accounts for nearly 20% of the U.S. economy, touching every community and driving millions of jobs,” National Association of Realtors’ executive vice president and chief advocacy officer Shannon McGahn wrote in HousingWire. “Each additional day of uncertainty threatens programs that help buyers, sellers, and property owners navigate an already-challenging market.”
In flood-prone states like Florida, where the real estate industry accounted for $381.4 billion, or 24.1% of the gross state product in 2023, the largest share of any state, the lapse of the National Flood Insurance Program could be devastating. NFIP is administered through FEMA and covers 22,600 participating NFIP communities. Its pause has meant that would-be homebuyers are no longer able to get mortgages from government-backed lenders, which require them to have flood insurance.
“Given Florida’s large share of national housing activity, even a modest pullback in buyer engagement could visibly nudge national sales and inventory metrics”. Anthony Smith, senior economist at Realtor.com, said in a recent interview. The administrative bottlenecks lead to a growing backlog of rental applications, delayed closings, and a shortage of new inventory, which increases pressure on rents and cash flow for existing owners, especially in heavily impacted states.
IRS Tax Credits and Landlords With GSA-Housed Workers
Additionally, landlords and developers expecting IRS reviews for a multifamily housing project in an opportunity zone could also face delays and funding shortfalls, according to NAOIP: Market Share—The Official Blog for Commercial Real Estate. Projects liable to be affected are those with low-income housing tax credits (LIHTCs) or historic tax credits.
Other commercial projects that could face problems are those housing government workers, such as the General Services Administration (GSA).
The Impact on Mom-and-Pop Investors
Small investors and landlords without the deep reserves to withstand an extended shutdown could be particularly vulnerable, as was the case during the pandemic, when they still had to pay taxes, insurance, and, in many cases, mortgages due to a pause in rental payments.
The White House Council of Economic Advisors warned that a month-long shutdown could cut $30 billion from consumer spending, according to the BBC. This means rental payments might be sacrificed for essentials like food and heat, affecting landlords.
For investors, the prospect of holding vacant units or paying for repairs out of pocket is not an easy decision to make when the end of the shutdown is not guaranteed.
Preparing for an Extended Shutdown
The longer the government shutdown continues, the worse it could be for real estate investors, particularly those relying on HUD programs such as Section 8 rental assistance. So far, the government-issued rental checks have not been affected, but they could be if the shutdown is prolonged.
Here’s what landlords should know, according to Multifamily Dive:
- During a government shutdown, landlords cannot evict Section 8 tenants or enforce rent hikes.
- Existing contracts and federal law mandate that tenants only make their portion of payments.
- The government will reimburse delayed government payments after the shutdown
- Landlords cannot penalize tenants for delayed federal payments or ask tenants to make up the shortfall.
There are several proactive measures that landlords can take, according to the Multifamily Dive article:
- Stay updated with local authorities about funding and payment schedules. Limited staff may make it difficult to reach anyone by phone, so check the authority website for updates. Keep an honest, open discussion with tenants to maintain trust and manage uncertainties.
- Plan for payment of operating expenses from a property reserve (it could be in the form of a loan) until you get reimbursed.
- Document everything, including rent receipts, HUD letters, and defaulted payments from HUD.
- Try not to neglect the maintenance and upkeep of your buildings to ensure all inspections and compliance activities remain on par.
- Know your rights. Keep lawyers on hand to press your cases, and keep aware of nonprofits that can offer financial assistance.
Long-Term Woes
If we’ve learned anything from the current administration’s strategies regarding government agencies, particularly those serving a lower-income demographic, it is that nothing is off the table, with Section 8 housing seemingly in the crosshairs.
Will Fischer, director of housing policy at the Center on Budget and Policy Priorities, a nonpartisan think tank, told ProPublica: “These are rules that are going to cause an enormous amount of hardship for millions of people in communities across the country. It’s going to cause people to become homeless, kids to be pulled out of their schools, people to lose their jobs.”
That means landlords should start thinking now about alternatives to government-funded housing. There is still a housing shortage, and people need a place to live. However, getting the government to foot the bill may not always be a guarantee.
Final Thoughts: The Losers and Winners in a Shutdown
A pandemic, a sudden hike in interest rates, or a government shutdown invariably exposes those unable to weather the storm. However, for the deep-pocketed, it also presents an opportunity. It creates fluidity in the markets and limits competition, forcing cash-strapped owners to list their buildings at a discount in search of a quick sale.
The second week of the shutdown saw new listings up 4.6%, according to Realtor.com, a modest increase. In times of disruption, those who can move quickly and creatively often capture opportunities that others miss.
But most are just hoping for stability. “We’re reaching this critical inflection point in terms of the government shutdown and its ramifications for the broader economy,” Stash Graham, managing director of Graham Capital Management, told the BBC.
We can only hope it ends soon.
