Strength continues as the world recovers from the pandemic
By Patrick Duffy
When the U.S. economy first began to shut down last March in an attempt to control the spread of the novel COVID-19 virus, most economists were placing bets on various recovery scenarios to follow, represented by the letters V (very fast and steep), U (more gradual after a delay), W (an initial recovery followed by a double dip) or L (a long, very slow recovery). What they weren’t betting on was the letter K, in which the recovery is largely split between a new type of haves and have-nots, and based either on the ability to continue working online from anywhere, or employed by a large company able to weather the storm.
They also weren’t betting on high levels of economic resilience and adaptation, which have led to an overall rebound much faster and stronger than expected just a few months ago. In its most recent forecast released in late January, the International Monetary Fund (IMF) upgraded its global forecast for 5.5% growth in 2021, a small increase from its projection of 5.2% last October. The IMF also found that the global economy contracted by an estimated 3.5% in 2020, significantly less than the estimated drop of 4.4% in October.
According to the widely watched Case-Shiller Index, last November home prices rose by 9.5% year-on-year, for the steepest annual rise in six years…”
Although subject to high uncertainty, the IMF’s forecast assumes widespread vaccine availability by this summer for richer countries, and extended to most countries by the second half of 2022. However, the success of this plan greatly depends on winning the race between effectively distributing these vaccines versus a constantly mutating virus, with countries providing effective fiscal support until the pandemic ends.
In terms of the building industry, for those people who can work remotely and with sufficient income, savings and credit scores, 2020 was a great year to search for more space, whether that was in the same city, an outlying suburb or even a new town. But it’s become an increasingly competitive market: According to the widely watched Case-Shiller Index, last November home prices rose by 9.5% year-on-year, for the steepest annual rise in six years, thereby making mortgage payments more expensive, even with lower interest rates. A similar paired home sale index for November by the FHFA, which oversees FannieMae and FreddieMac, reported home prices rising by an even steeper 11% during the same time period.
To a lesser extent, the emerging single-family rental sector has also noted increased competition, with an index by CoreLogic reporting annual rent growth of 3.7% in November, up from 2.8% a year earlier. With the inventory of new homes for sale averaging 4.1 months of supply in November, that timeline could shrink even further given pent-up demand, especially considering an inventory timeline of just 1.9 months for existing homes in December.
For those builders who had invested in their online infrastructure before or during the pandemic, potential buyers could review floor plans and compare multiple options outside of a design studio, while sales directors, loan officers and escrow coordinators could move the process forward from anywhere with a decent Internet connection. This group represents the upper-right part of the K-shaped recovery, and has provided an important foundation for the housing boom which emerged in 2020.
In contrast, the group representing the bottom-right part of the letter K mostly included those whose jobs could not be done online but were in demand – such as those working in health care, manufacturing or essential retail – or whose places of employment had been severely curtailed or shuttered – such as those working in travel, lodging, food services, transportation, personal services and live events.
For this second group, 2020 was more a year of delayed unemployment benefits, tapping savings accounts and taking advantage of eviction moratorium and mortgage forbearance programs while keeping their fingers crossed for better days ahead. Notably, this group also includes tens of millions of small business owners, who together employ nearly half of all Americans.
It is this second group which should be closely targeted for more economic stimulus under the new Biden Administration, and which accounts for the nearly 10 million jobs still lost to the pandemic. Moreover, with a recent study by Moodys Analytics estimating 10 million renters owing $57 billion in back rent to the nation’s landlords and the Mortgage Bankers Association estimating another 2.7 million homeowners in forbearance plans, at some point these patient investors and lenders will expect to be paid. Until that happens, the economy will not be able to reach its pre-pandemic potential, and hopefully turn that K shape into a V.
Patrick Duffy is the Managing Editor of EconUpdate, a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at email@example.com or at 310-666-8288.