The Coronavirus has created a unique financial situation. Unemployment rates are at record highs, with companies announcing long term downsizing. At the same time residential real estate is hitting new records and continues to increase in the face of the economic uncertainty. How is housing defying the traditional recessionary “fall” like 08 while the number unemployed is also setting records? Will housing or unemployment win the tug of war?
What is happening with unemployment?
Global corporations have announced more than 200,000 job cuts or buyouts in recent weeks, a worrying sign that more losses will come as furloughs implemented early in the pandemic turn into permanent layoffs.
MGM Resorts International and Coca-Cola Co. were the latest examples on Friday, joining an increasing number of companies that are trimming their workforce after economies emerged from shutdowns. Almost a quarter of U.S. workers that were temporarily laid off probably won’t come back, according to Goldman Sachs Group Inc. estimates.
Banks are also seeing the economic fallout. “No question, layoffs (will) come across the board for all the banks,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, which invests in JPMorgan Chase and other large Canadian banks.
Banks have to cut costs because of expected credit issues, as well as low interest rates and regulatory pressure to trim dividends, he said. Bank staff could shrink by an average of 5-10%, mainly at mid- and lower levels in technology, human resources and finance departments, according to Alan Johnson, head of the compensation consultancy Johnson Associates, Inc.
The Layoffs are multiplying throughout the economy from Airlines, consumer products, hospitality, and financial firms. Furthermore, local governments will soon be forced to trim as well as the economic fallout filters through to sales tax revenue that funds many local governments.
What traditionally happens in a recession?
Traditionally in a recession job losses lead to a decline in asset prices like housing. This has occurred in every recession in the last 50 years. The current recession seems to be defying any semblance of economic norms. As job losses have intensified, real estate is hitting records with prices continuing to appreciate at a torrid pace.
How is housing defying the traditional “recessionary” fall?
When the virus initially hit, I was bracing for a large hit to real estate. I didn’t foresee a 2008 crash, but my prediction was that real estate would fall in the 5-10% range in many markets and would at best be flat in “hot markets”. I, like almost every economist, totally missed on this prediction as housing did just the opposite. This has got me thinking of what has changed in this recession compared to prior ones?
- Huge drop in mortgage rates: Historically low rates have led to a huge surge in buying. With the 30-year fixed rates below 3%, borrowers can afford 25-30% more house than when rates were in the 4% range a few months ago. Rates look to remain at historic lows for the next 3-5 years based on recent federal reserve guidance which will help drive
- Limited housing Supply: Supply in most markets never got out of hand this economic cycle as capital for spec building was constrained, this limited supply is a primary factor driving the market higher.
- Consumer behavior did a U-turn: With the new work from home and shelter in place, this totally changed consumer behavior. Prior to the virus, there was a trend towards smaller is better, that trend is out the window as buyers demand yards, more space for home offices, and more space in general to spread out with the whole family spending more time at home
Will housing continue driving the economy?
In the short term (next 3-6) months, I don’t see anything derailing the housing run, but long term there are storm clouds on the horizon. As Mark Twain famously stated that history doesn’t repeat, but rhymes.
During the initial wave of the virus there was hope of a quick bounce back of the economy, unfortunately that dream is over. There have been fundamental structural changes in the economy that in the past might have taken 5-10 years happened in a period of six months.
For example, business travel is fundamentally changed forever. Companies have figured out how efficient virtual work can be without the huge expense of in person travel. Although, I don’t think that business travel is going extinct, it will be considerably less for many years if not forever. This means that Airlines have to downsize, business hotels have to change, convention centers, restaurants, etc…
Business travel is just one example of the huge changes, think of online shopping, buying a car, etc… the economy has gotten exponentially more efficient and many employees are going to be downsized due to the efficiency. At the onset of the virus, these job losses were focused on lower paid hospitality workers, but don’t look for this trend to continue. As businesses and the economy adjust to the “new normal” these job losses will propagate to higher paid workers.
Take a bank for example, as online banking’s adoption soared, there is no longer a need for as many branches, or branch managers, or bank officers, these functions are moved into central locations at considerable cost savings. For example, a loan specialist sitting in a central office can service twice as many mortgages without face to face meetings with clients
Long term there will be pain in the housing market as losses in higher paid jobs filter through the economy. Although I don’t foresee a cliff drop like 08, Housing will give back some gains and appreciation will turn into small depreciation (5-10%) in most markets.
Summary
Fortunately, 08 will not repeat itself due to rock bottom interest rates and lack of inventory. Regardless of a vaccine, fundamental changes in the economy have occurred that will take years to adapt to. The enormous changes in the economy will filter through with layoffs focused on lower paying jobs, but higher paying jobs will not remain unscathed and we will begin to see the impacts later this year or early 21. 2021 will not be a repeat of the gangbuster real estate market in 2020.
Additional reading/Resources
- https://www.bloomberg.com/news/articles/2020-08-29/job-cuts-at-mgm-coca-cola-boeing-herald-economic-pain-ahead
- https://www.reuters.com/article/us-usa-banks-layoffs/banks-eye-layoffs-as-short-term-crisis-ends-long-term-costs-emerge-idUSKBN25O1KI
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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