COVID-19 Market Update with Mark Sprague

Real Estate

What impact has COVID 19 had on the nation’s economy? 

 

We have never had a crisis like this before, however, most are pointing to previous crises like 9/11, 2008, and WW2, the Depression as far as an economic impact. But again, there is not a good comparison. 

People want to work and are being prevented from doing such. Household budgets are struggling. The financial system is struggling.

The supply chain, in turn, is struggling to keep up with a changing economic and lifestyle impact.

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 that if workers can’t work.

The good news is, about 70% of the nation's workforce is working presently.

 

What impact do you think COVID-19 will have on Austin’s economy?

SXSW was a loss of $500+ million annually to the local economy.

Housing is a positive light in Austin. Locally there is not enough shelter inventory in all channels. So real estate will probably have another good year.

If builders quit building, that actually causes values to increase due to the lack of enough shelter being built.

Locally, however, many of our restaurants and businesses are dependent on the many festivals and conventions that are part of our history and culture (SXSW, ACL, F1 races and events, etc.) and their loss of income will definitely be felt. 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 were not projected to do as well this year as in previous years. So we will have to see. Living and working in the center of the country may have its benefits. On a gloomy note, yes, some international economies could enter into a recession, particularly if their economy is closely tied to China, Italy and other larger infected economies. That’s a sensational idea bound to get lots of attention. Is it real? We’ll see what happens.

 

Will the United States / Austin enter a recession?

Many economists/analysts felt we (the US) were headed that way after an unprecedented positive run of 127 months.  (the reasons below)

So nationally, I don’t see how you can prevent it. Presently most analysts feel that Q220 will be 0% GDP growth. Q320 -.% GDP.  That qualifies for the definition of a recession.

The question is how long? 18 out of the top 20 economies were already projected to be weaker this year, some 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, the numbers will show a slowdown.

We have never seen a crisis like this, where people are being kept from working and do not know when they can start again. Capitalism only exists because work exists — but coronavirus lockdowns essentially ban work.

Austin 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 shown any slowing. Leasing because of its nature has slowed.

Many Austin companies are having their employees work remotely. Historically, that causes stronger 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 when we emerge on the other side of this crisis. So no, 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 on purchasing a new home or refinancing? How does the Federal Reserve move to reduce its 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 the money out. 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% 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%. That being said, the mortgage companies, banks, etc. also do not have enough personnel to handle the business. Current low rates have already caused a boom in refinancing activity. And demand among homebuyers 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, 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. Austin at 4.7%

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 today (3/18/2020 10:20 am) in the mid 19,000’s. 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.

Recovery depends on the economic strength of your local market. Austin 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 to 2009. In 2011 Austin 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.

Experts have varying answers — 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. But it will ultimately depend on getting the virus under control. Until then, we will be treading water at which point the economy will take off because it’s relatively easy to reopen a restaurant, it’s relatively easy to reopen many offices, etc.

However, do understand that this crisis will have a lasting effect on how business is conducted. Anywhere that people gather en masse, we’ll have to put a protective protocol in place. There is a cost as well as public concerns for those businesses. Recovering economically will take some time.

If it is brought under control in a couple of months, we are probably looking at a 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 a 20% decrease in consumer spending, effectively hurting GDP by 3 to 5 points. Hopefully, the US is ahead in disease prevention, so 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 they do not have enough real estate inventory. 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 Austin has confirmed cases will impact it as a destination for employers?

Presently no. Most of the major metros have confirmed cases.

Austin has not been a destination for corporations because of the health of the workforce. The attractiveness has been the level of education of its populace (see below), fair weather, and relatively low cost of living compared to similar metros.

MSA's Ranked by Education

What have previous disasters taught us about how our economy responds to events like this?

The main lesson is that Austin 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 Austin economy continues to be based strongly on technology, higher learning, and state government 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 Austin Chamber’s focus on recruiting multiple segments of the industry should help tremendously.

As discussed earlier, a large segment of the local population’s employment is dependent on Austin’s multiple festivals, sporting events, etc. They will recover, but their patience and assets will be tested as the length of this crisis are 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 Austin real estate market as this event continues to play out?

Any slowdown in construction will increase values presently, 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, closing job sites to labor crews, 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.

We have not seen national numbers yet. However, remember year-over-year sales from the west coast and east coast (where state income tax, tax burden, and regulation are high) were declining before this crisis. I would think they will continue that trend presently. Which in turn bodes well for Austin and the region.

Do you maintain a strong forecast for the Austin 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 shown remarkable resiliency in the face of crisis.

We are all in this together. So those industries that have and will take a beating should come back. Again, it just depends on the length and depth of the crisis. Presently we have not seen an economic slowdown in the Austin and regional housing market.