By Mark Sprague, State Director of Information Capital
Here’s an update on some recent questions I’ve been considering, with input and feedback from much wiser analysts/economists whose seminars I have been able to sit in on the last few weeks.
What impact has COVID 19 had on the nation’s economy?
We have never had a crisis like this before. Comparisons to previous crises like 9/11, 2008, and WW2, and the Great Depression are not useful. Unlike previous economic crises, people have/had jobs, want to work, and are being prevented from doing so. Household budgets are struggling. The financial system is struggling. Supply chains, in turn, are struggling to keep up with a changing economic and lifestyle impact.
The standard economic indicators tell the story …
- U.S. nonfarm payrolls lost 701,000 jobs in March, by far the largest loss since the Great Recession.
- Private payrolls lost 713,000 in March. The losses in the private sector were broad-based with goods-producing industries losing 54,000, private services losing 659,000 and government adding 12,000.
- Within the 54,000 loss, construction was down 29,000 jobs, nondurable-goods manufacturing fell by 11,000, while durable-goods manufacturing and mining and logging industries both lost 7,000 jobs.
- For private service industries (which typically account for the majority of job creation), payrolls declined by 659,000, led by a 459,000 decrease in leisure and hospitality. Health care and social-assistance industries fell by 61,200, professional and business services declined by 52,000 with temporary help accounting for 49,500 of that total. Retail lost 46,200 workers while “other” services decreased by 24,000.
- The unemployment rate jumped to 4.4 percent and the participation rate declined to 62.7 percent. Both reverse positive results over the last several years. Average hourly earnings rose 0.4 percent in March, resulting in a 12-month gain of 3.1 percent. The average length of the workweek decreased by 0.2 hours to 34.2 hours in March.
- Initial claims for unemployment insurance totaled 10 million in the last two weeks of March (and are not completely captured in the March employment report) suggesting additional steep losses in the coming months. Initial claims for unemployment insurance soared to 6.65 million for the week ending March 28, doubling last week’s shocking 3.3 million, and dwarfing the previous high of 695,000 in October 1982.
- During the Great Recession in 2008-09, total job losses were 8.8 million over 25 months versus a 2-week total of 9.96 million initial claims in just two weeks.
In response to all the above, our current stimulus ($2 trillion) probably will not be enough. 2019 GDP was $21.4T – $5.25T per quarter. Obviously, we cannot maintain the GDP if workers can’t work. Also, realize that most of these jobs were jobs taken away by government mandate. On the other side of this crisis, most jobs will be recreated, and that portion of the populace will go back to work.
The good news is, about 70% of the nation’s workforce is still employed.
What impact do you think COVID-19 will have on DFW’s economy?
In 2018 the DFW GDP was just under $520 billion. We are losing about 20% to 30% a week. Home sales are off about 8% from this time last year.
Housing is a positive light in DFW. Locally there is not enough shelter/inventory, and real estate will probably have another good year. If builders quit building new homes, that actually causes values to increase in the resale market.
Locally however, many of our restaurants and businesses are dependent on the many festivals and conventions that are part of our history and culture. At this point, it’s hard to say how deep that will affect us locally.
Nationally and internationally, it’s a different story with many economies disrupted greatly due to the outbreak. If you are keeping millions home away from productive factories, it will be felt. The question is, to what extent? Of the top 20 economies, 18 are not projected to do as well this year as in previous years, so we will have to see. Some international economies could enter into a recession, particularly if their economy is closely tied to China, Italy or other larger infected economies. We’ll see what happens.
Will the United States / DFW enter a recession?
It’s okay to say the R-word: “recession.” Nationally, I don’t see how you can prevent it. Many economists/analysts felt we (the US) were already headed that way after an unprecedented positive run of 127 months. Most analysts feel that Q220 will be 0% GDP growth, with Q320 at -% GDP. That is the definition of a recession.
The question is how long? 18 out of the top 20 economies are already projected to be weaker this year, with some already in recession. 85% of our GDP is in consumer goods. The buying and selling of such products are being prevented by social distancing policies. Therefore, we will experience a slowdown.
DFW has been blessed in leading the nation in so many ways. That has placed stress on the lack of real estate inventory in multiple channels. At this point, sales have not showed any signs of slowing, although leasing has slowed.
Many DFW companies are having their employees work remotely, which past studies show improves output. But remote working hasn’t been measured with the kids at home and so many businesses closed. I would think that all the chaos will have some negative impact.
I do think the strength of the current economy will bode well for us when we emerge on the other side of this crisis. I would be surprised if we had 180+ days of negative growth after the crisis.
With mortgage rates being so low, what can homeowners/buyers expect when purchasing a new home or refinancing? How does the Federal Reserve move to reduce their lending rate to 0% impact the housing market and real estate?
A common misconception is that mortgage rates are tied to the Federal Reserve rates. Remember the Fed rate is for its member banks, like the federal reserve in Dallas. They in-turn lend to the member banks. The member banks then lend money to consumers, businesses, etc. To support the costs of lending (meeting all the legal requirements over the 30 years of the note, etc.), the banks need a margin of least a point and a half. So, we are up to around 3% in mortgage lending rates.
Secondly, remember someone must buy these mortgage notes. Lower rates mean lower returns. When the Fed dropped the rate to 0.75 last week, anyone who wanted to invest a million dollars in US treasuries was only getting $675 per month return, which is not a strong enough incentive to invest.
Thirdly, since 2018, over 85% of mortgagees have refinanced under 4.5%. Current low rates have already caused a boom in refinance activity, and mortgage companies, banks, etc. do not have enough personnel to handle the business. And demand among home buyers remains elevated, despite the short supply of homes for sale. As a result, lenders don’t need to give Americans much more incentive to apply for new home loans. If you don’t have enough people to process the volume you’re getting in, you’re not going to lower rates to attract more volume. The result is mortgage rates may increase slightly, due to the reasons above.
We saw that two weeks ago, mortgage rates increased slightly, in part because some lenders had artificially raised rates to stem the number of people applying for home loans and give themselves some time to work through the backlog of applications that accumulated as rates fell. Lenders will also face pressure to hedge with interest rates, since bond yields could increase from the time when a borrower locks in a rate until when they close the loan, which would make it harder to sell the loan on the secondary market.
We already are experiencing tightening of jumbo loans, business loans, and development loans. It will take a couple of years for that to return to pre-crisis mode.
How long before we begin to see an economic recovery once the virus has subsided?
The Coronavirus pandemic has already thrust parts of the global economy into a recession by bringing some of its most vital parts to a screeching halt.
The crisis has caused a slowdown in economic activity across the US and the world. Restaurants and bars have scaled back service or closed altogether. Airlines have slashed flights amid widening travel restrictions. Many companies have closed offices and/or have employees working remotely. Millions of people have hunkered down at home to stop the deadly virus from spreading further. And many may be out of their jobs or working reduced hours.
But when do those massive changes become a recession? The most common definition is two consecutive three-month periods of negative economic growth as measured by gross domestic product, or GDP — the value of the nation’s produced goods and services. Healthy GDP growth is somewhere between 3.5% and 5% annually. The US ended at 2.3% last year. Texas 4.7% last year. DFW at 3.7%.
While economists expect the nation’s GDP to tumble in the second quarter of this year as the pandemic unfolds, some experts aren’t waiting that long to declare a recession, given the virus’s immediate and devastating effects on the economy.
The Dow Jones Index was above 29,000 the start of the year – as of yesterday (4/13/2020 4:20 PM) 23,390 up from dropping to the mid 19,000’s in late March. The ability to recapture those values will take time and trust in the market. That could happen in 2 to 3 months or perhaps take a couple of years. At this point, although investors are wary, they seem to be optimistic about opportunities in the near term.
Recovery depends on the economic strength of your local market. DFW and most Texas metros should rebound quickly due to the low unemployment, need to fill jobs, not enough real estate inventory, etc.
The last US recession came amid the financial crisis of the late 2000s and lasted from late 2007 into 2009. In 2011 DFW and Austin metros led the nation in recovery with the shortest stint of the top 50 metros in recession. The rest of the state turned in 2012-13. In the rest of the nation, unemployment peaked at 10 percent and the nation’s GDP plunged more than 4 percent. (Texas and the majority of the oil states experienced a much worse downturn in the late ’80s.)
Experts have varying predictions — some expect a brief downturn while others say trouble could stretch until a coronavirus vaccine is widely available, which may not come until next year. Real recovery will ultimately depend on getting the virus under control. Until then, we will be treading water. When the virus is controlled, the economy will take off because it’s relatively easy to reopen restaurants, offices, etc.
However, understand that this crisis will have a lasting effect on how business is conducted. Anywhere that people gather en masse, we’ll likely have to put protective protocols in place, which carries a cost. Recovering economically will take some time.
If the virus is brought under control in a couple of months (90 days from the start of the ‘shelter in place’ order), we are probably looking at the local economy recovering through the 3rd quarter of this year with a much stronger 4th quarter. Again, it just depends on the severity.
China has seen about a 20% decrease in consumer spending, effectively hurting GDP by 3 to 5 points. Hopefully the US is ahead in disease prevention, so we could see similar numbers or less for the U.S.
The good news is that most of the Texas metro economies have been leading the nation. Presently we do not have enough real estate inventory to meet demand, and sales continue to be robust comparatively. So far, 2020 sales and real estate values are remaining strong and should remain that way throughout 2020.
Do you think that the fact that DFW has confirmed cases will impact it as a destination for employers?
Presently no. Most of the major metros have confirmed cases.
DFW has not been a destination for corporations because of the health of the workforce. DFW has been the number one relocation spot in the nation since 2010 because companies are drawn to the level of education of its populace, fair weather, and relatively low cost of living compared to similar metros.
We do see employers delaying announcements about new commitments and facilities, and are not aware of any cancellations presently.
What have previous disasters taught us about how our economy responds to events like this?
The main lesson is that DFW and Texas economically turned quicker than the rest of the country after the last crisis. Why? Because we did not have the amount of speculation or financial leverage that so many markets had.
Presently, the DFW economy continues to be based strongly on economic sectors of finance, insurance, and real estate with multiple other channels contributing. That’s important, because many of the metros that experienced the economic crisis were dependent on one or two industries as well as highly leveraged financing. Highly leveraged financing has gone away, and the DFW metro’s focus on recruiting multiple segments of industry should help tremendously.
As discussed earlier, a large segment of the local population’s employment is dependent on DFW multiple conventions, sporting events, etc. They will recover, but their patience and assets will be tested as the length of this crisis is uncertain. No one likes uncertainty. Particularly when it comes to where our next paycheck is coming from.
Local market outlook:
What can we expect in the DFW real estate market as this event continues to play out?
Any slowdown in construction will increase values due to lack of inventory, labor, etc. There is not enough inventory presently in multiple channels. Slowing production exacerbates the problem, driving values up.
There is not enough labor now and closing job sites allows your competition to potentially hire them away. The same can be said about multiple industries in the current local market.
The local residential market has maintained and increased to a robust number of sales locally and regionally. With the lack of inventory, values should maintain.
On the commercial side, nationally +/-55% of all retail (that includes hospitality) is closed. I would think that DFW fits that model. Because of that amount of financial strain, it’s estimated that 1 out of 5 (20%) of businesses won’t make it. Presently most commercial leasing and sales agents are working and still meeting clients. Year-over-year commercial business has been delayed or slowed in the end of March.
We have not seen national commercial numbers yet. However, remember year-over-year sales from the west coast and east coast (where state income tax, tax burden, and regulations are high) were declining before this crisis. I would think they will continue that trend, which bodes well for DFW and the region.
Do you maintain a strong forecast for DFW housing market through the remainder of the year?
If the market returns to normal within 30 to 90 days, yes. Longer than that, it becomes a concern economically, because of the disruption and stoppage on revenue to multiple sources. We will have to revisit at that time. As a metro, region and nation, we have showed remarkable resiliency in the face of crisis.
We are all in this together. Those industries that have and will take a beating should come back. Again, it just depends on the length and depth of the crisis. At this point, we have not seen an economic slowdown in the DFW and regional housing market. We were running ahead of 2019 record numbers. If the crisis ends somewhere around the 90-day mark, it should be a robust 3rd and 4th quarter locally.
What can Realtors do?
What market indicators are important for agents to watch as the market potentially changes?
Watch market inventory. Presently most price channels are below equilibrium (6 months inventory) making them a sellers’ market. In each neighborhood, price channels need to be closely monitored to see what shifts happen in the local market. Obviously, expedient decisions are helpful in this market, so the more data and like sales that you can supply a seller should help.
Many investors are pushing back concerned about rental income, if values will maintain. What would you tell them?
My advice to investors who are balking in fear of rental/sales values is buy anyway. For those deals that are already in the pipeline, the mortgage rates/sales prices that you currently have will not be better on the other side of this crisis. Why? There is a huge strain on the financial system, which will in turn force the regulators and equity to be more cautious on their lending guidelines. We have already begun to see tightening credit guidelines on jumbo loans, commercial development loans, etc.
Cap rates will decline, as 10yr treasury continues to drop, although upward pressure coming from perceived risk on buildings has increased (think about casino, hotel, travel industry). The good news is the housing market remains strong locally and regionally. New home sales and construction plateaued nationally in 2019, despite job growth, low mortgage, and home price appreciation. Locally we still need more inventory and values continue to remain strong with greater demand.
As a side note, the SF housing market has historically been the leading edge of the whole economy. As it goes, so goes the economy. As soon as this crisis ends, there will be a rush to buy housing —maybe the end of May, June, July, August? Don’t take a vacation!
For commercial investors, more warehouse space must be constructed – “just in time” manufacturing and inventory, and relying on a single supplier in China, will be viewed as too risky. Businesses will carry more inventory, and JIT practices will be re-evaluated (toilet tissue for example).
For those investors that are anticipating a “foreclosure crisis” as seen with previous financial stress times, remember foreclosures are expensive and time-consuming for lenders. If this crisis ends within 90+/- days, there won’t be much opportunity to capitalize on foreclosures in Texas.
Most analysts see a bigger move to fixed assets (gold, silver, real estate, larger demand for farmland, ranches), as a hedge against inflation. Also, class B&C apartments will see increased demand, as well as RV parks.
Development in suburban areas becomes more attractive, as high-density urban areas look less attractive for health reasons – the “urban vibe” has lost some of its luster. This was already happening with millennials getting older, having kids, and boomers retiring. Telecommuting may drive this trend as well, as people don’t have to congregate in cities for work. Some investors will be more bullish on smaller towns near urban areas. This crisis just puts more focus on the strengths and weaknesses of dense development.
First, own the fact that none of us have seen a crisis like this. So …
- Rely on the facts as opposed to speculation when talking to clients.
- Don’t panic. A measured and analytic response will be more useful, particularly long-term.
- Don’t scrap your 2020 business plan! Your 2020 may not work out as you’d planned as recently as four weeks ago. Personally, I think your plan could be more aggressive in local real estate markets. Time will tell.
- Success truly depends how you handle the challenges ahead. Much of the concern about the demand and supply sides of the housing equation is just timing. The good news is that people experienced in real estate are used to dealing with challenges.
Hopefully this helps. We all hope 2020 and the years to follow continue to bring opportunities for success.
If there is anything else, we can help you with, let us know.