The B&D Interview: Christopher Thornberg, Founding Partner, Beacon Economics

Economics expert explains why this downturn will look different from past recessions, and why we shouldn’t lose hope so quickly

Builder and Developer Magazine: How was the state of the economy and the housing market before the pandemic? And what have been the biggest factors adversely affecting the economy?

Chris Thornberg: The economy has been fine. While I acknowledge that growth hasn’t been great, the fundamentals of our economy have been very steady, and for the most part our forecasts have been an ongoing expansion for years. That has not been the general opinion. The “market consensus” in January of last year, you had 75% of economists who contributed to The Wall Street Journal Next Recession Survey said we were going to have a recession by 2020. There has been a real march toward taking these dramatically negative, if completely unsubstantiated ideas and turning them into a forecast. So then you come to the first part of this year, in February only 10% said we were going to have a recession in 2020. Well after they all walked away from their preposterous opinions, guess what, we had a recession in 2020. And while absolutely this is a recession, it was not a recession we anticipated obviously, but the level of hyperbolic hysteria has simply ratcheted up accordingly.

The Great Recession was bad because prior there was a $15 trillion sum-prime credit bubble. There is no worse shock to the economy than a collapsing debt bubble. Today’s numbers are jarring in terms of the unemployment rate, but there’s no financial bubble. There’s no real problem in the economy outside of these public health mandates that have been temporarily put into place. Things are already starting to turn a corner. High-speed data on internet transactions all suggest that consumer spending is starting to pick up again. The number of initial claims for unemployment, which spiked so traumatically so quickly, is already falling quite sharply. So, is it going to be a record negative Q2? Yes. It’s also going to be a record positive Q3, and by the end of the year I expect we’ll be right back to where we were at the start of the year.

B&D: In your opinion, what sort of indicators should people be looking at to get a sense of where the market is at?

CT: I would mainly be paying attention to mortgage application data and mortgage data because that will tell you if people are borrowing money and still buying. And my understanding is there’s still pretty good demand for it. In fact, these low interest rates have really set off a surge of people looking for stuff to buy.

B&D: Are there any other significant trends people should watch for?

CT: We won’t see Q2 GDP until the end of July. There are a lot of people rushing to conclusions. I think people should stay away from those screaming headlines that get into your head. With that in mind, I would continue to pay attention to initial claims for unemployment. If they start to rise again that suggests a second round of pain, and that one can be a little more substantial than the first one. My biggest worry about this whole thing is that we start passing long-run regulations on the basis of this short-run shock to the system, and that could make things worse. The kind of stuff that really worries me is those trying to pass permanent rent control, or permanent restrictions on evictions because of a short-run problem. The housing shortage hasn’t gone anywhere, and we’re losing track of things because of this virus.

B&D: Are there any short-term regulatory moves that you think would be better than a long-term, more permanent move?

CT: I think you’re probably better off, as opposed to having restrictions on evictions and maybe short term rent control, simply telling all landlord that you had to give all your tenants a month free rent. And I know that sounds odd, but there is this issue, which I don’t think this is bad from a long-run stand point, but we know when we come out of this there are going to be lots of renters who are going to be a couple months behind. One of the real long-run problems in the U.S. is wealth inequality. We know there’s a lot of wealth sitting with a small number of people. That all suggests that, opposed to thinking about restricting evictions, or putting in rent control, we’d be better off just giving everybody a month break on their rent.

B&D: Would you also suggest that we supplement those landlords?

CT: No. I’m a landowner. Most landowners can handle a little bit of a hit. Most restaurant workers can’t. So who really should be bearing the burden of this short-run shutdown on the economy, not low-income renter. Rich landowners should. If any landlord can’t handle six weeks of not being paid rent without going into major default, they deserve to go into default because everybody’s suppose to have a little bit more leeway than that. That’s my thought process on that, and it will help with the wealth inequality problem ultimately.