Ten Economic Questions for 2021

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Real Estate

Ten Economic Questions for 2021 (focus on Texas)
Posted on December 30, 2020

By Mark Sprague, State Director of Information Capital

Every presentation, every forecast the disclaimer ‘that a recession could be caused by “a catastrophic event” such as significant global military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, supervolcano, etc.), terrorist attack on a port, a demagnetizing bomb, (think about it….) and several other low probability reasons” (emphasis added). I don’t think many of us listed a ‘Pandemic’, and if we did it would be considered ‘low probability’. That was the typical scenario that happened in movies, not reality………

Unfortunately, 2020 saw one of those “low probability” events, and many of our predictions were not even close and some had surprising outcomes. In a way, this is the point of the predictions. We base them on ‘high probability’ outcomes. None of us have a crystal ball, a window into the future, (not that we would want that.) But I think it helps to outline what we think will happen – and understand – review the numbers and change our minds when the outlook is wrong. (that doesn’t happen, does it?) As an example, when the pandemic hit, we switched from being mostly positive on the economy to calling a recession in early March. Even though the parameters of a recession had not been met yet. (definition of a recession is two negative quarters in a row.)

On a global basis, many countries’ economies were already in retreat for various reasons, so many felt that a national recession was just down the road. We can never forecast the reason for a recession, but we can always look at the past and give you a specific point of economic retraction. That said, again I don’t think ‘super-virus’ / pandemic was on anyone’s reasons for a recession………

Yet, even in recession residential real estate led the way. In my lifetime, I do not remember real estate doing well, while the rest of the economy drags. That just does not happen, till this year!

100 years from now, what will 2020 be remembered for?
A catalyst year. A year of change. Lots of things, as far as business and economics besides the economy being stalled because of a virus, it was a trend breaker and trend starter. It became a time machine, forcing trends that would normally happen over 10+ years to mature in less than a year.

In real estate, we saw warehouses, offices, retail, hotels, bars, recreation, seminars, and so much more rethought and redone.

Warehouses saw expansion with a greater need for storage as online shopping exploded. Also, hoarding caused shortages. All needing more warehouse space.

With so many remote officing, offices are going to disappear……Wrong. Although many more people have worked remotely more often or for the first time, this year. To cut costs CEOs / CFO’s would need less office space correct? So much corporate savings……

As the year wore on, we did not see many corporations nationally downsizing. Yes, there was an initial delay in early March / April then we suddenly were all on Zoom conference calls, webinars, etc. There were costs involved in doing business differently. More laptops, lights, desks, DIY projects to make that home space more livable. Consumers deciding to move up or purchase for the first time. Low borrowing rates helped. All driving different portions of the industries to highs. By the end of the year, many industries saw a need for relocation and more hiring. So, office space will be fine long term. The short-term remote work was just that……

Hospitality will be challenged for a while with a lack of large events, seminars, festivals as COVID and health standards change.

So, 2020 was where retail changed, online shopping exploded, residential real estate shifted into another gear we had not seen before and so much more.

And a year where something we did not expect, a virus spread across borders quicker than we could contain it………

Lots of lessons this year.

Based on what we know from this last year and looking at history, where are we headed this year?

We are going to look at this from a national view and narrow it down to regional and local.

Will housing inventory increase or decrease in 2021?  
First off, I don’t think any of us expected the record year of 2020 residentially, particularly in March and April of this year. There were massive layoffs nationwide, regionally, and locally. All systems were at ‘full stop’; with forwarding momentum allowing the economy to drift forward.

Yes, we had near record-low rates, but who is thinking about buying/renting a house when we do not know if our jobs will be deemed necessary? Whole industries were shut down with hospitality, leisure, and retail taking the brunt of the economic downturn. Predictions were that one out of five businesses would not survive a ‘shutdown’, and unfortunately, that looks to be the case going into 2021.

Although we have had a political change in administration and personnel, rates should remain low, and stopping the virus and getting the economy going again are top priorities.

Record reemployment will be evident across the nation this year in many channels. However, some economic channels and industries will take years to recover, Oil, hospitality, leisure, and retail should be challenged for a while. Those economies (regional/local particularly) that have a high focus on these channels will take years to recover. What happens to those properties, employees, industries?

According to the November 2020 NAR report on existing home sales housing inventory was down over 20% and the months’ supply at a record low 2.3 months nationally. Regionally and locally even less inventory as most Texas metros selling more inventory per month than was being listed.

To have home sales you must have jobs being created. Most of the country continues to lag in reemployment. Here in Texas most of our metros are blessed with continued reemployment and new jobs being created. Austin, DFW, San Antonio continue to lead the nation with 65% to 85% or those laid off, back employed. These metros as they have done for the last 10 years, continue to lead the nation in job growth.

You notice that I did not include Houston. Why? 350,200K+ jobs lost in the Houston area in 2020. Much harsher than any previous downturn or recession. Unfortunately, many of them were high paying oil industry jobs. How does this compare to previous Houston downturns? 80’s oil bust 226,100 layoffs. (Texas real estate fell to $.10 on the dollar. The only time that Texas real estate has lost value in my lifetime.) Great recession 120,500.

Where is Houston now? Houston may still have more layoffs pertaining to the oil industry. Besides, it still needs to add 176,000 jobs to be recovered from 2021 layoffs. Historically Houston creates between 30K to 70K new jobs a year. It will take a while to recover. However residential values and sales have maintained presently.

What that means is that housing inventory will continue to be scarce both from a resale side as well as from a new home side (as builders struggle to keep up.) We did not have enough inventory going into this COVID lockdown and recession, even without the explosive job growth we would not have enough inventory coming out. That will be a common theme throughout 2021……

What will happen to home prices in 2021?
If you did not have enough housing inventory going into 2021 what makes you think that demand or values will downward shift? If anything, most residential markets will continue to see values improve in the higher single digits. Less than 6 months of inventory has always been considered a ‘sellers’ market’. with little to no negotiation and the possibility of multiple offers above the asking price, (high single-digit or low double-digit). so yes, values will continue to improve. Values continue to be a reflection of job growth.

So, shouldn’t it be easy to just build for the demand? Not that easy. First, when you say just build, you are thinking in your current neighborhood, where cost and desirability prevent new homes. So, we do what we have done for centuries, we ‘drive till we qualify’. Most entry-level homes are usually on the outer rim of our thriving metros. Secondly, you just cannot start building wherever you want. There is an ‘entitlement process’, making sure that utilities, streets, lots, etc. are done to proper standards. In most markets, it can be 6 weeks to 10 months. However, on either coast, it can take years. In most of our Texas metros, it’s the former, except for the Austin area where the minimum is just over 2 years and can be long as 8 years. Demand today will take a while to meet. ‘Time is money’, every delay causes values to rise and COVID has pushed those delays out farther.

CoreLogic data for October showed prices up 7.3% year-over-year. The September Case-Shiller data showed prices up 7.0% YoY. With inventory lower than expected, house prices picked up more than expected.

So, yes values in all price points will continue to rise in most of our regional and national metros, hopefully remaining in the single digits through 2021.

A healthy ratio of resale vs. new historically is 75% to 80% resale and the rest new. Whenever the ratio gets outside those parameters we are overbuilding or underbuilding.

Lastly, material costs rapidly escalated this year due to DIY projects, people wanting to make their home more of an oasis. Etc. Values will continue to rise/improve through 2021.

All of our Texas metros will continue to see rising residential values.

How much will sales and homes start to increase this year?
As much as inventory will allow it to. The surge we saw in early summer will be hard to repeat unless we have the same harsh parameters, we saw in early March / April 2020 where the spring buying season was pushed into the summer buying season.

But we will continue to see strong demand tied to strong job creation. Home sales and starts regionally will rise in the high single digits only governed by land developed available to build on.

Through November, starts were up 7.0% year-over-year compared to the same period in 2019. New home sales were up 19.1% year-to-date through November nationally. Regionally sales will be restrained by a lack of inventory.

Will the Fed cut or raise rates in 2021?
 Currently, the Federal Reserve will stay on hold in 2021 and the Federal funds eventually will start going up by the end of 2022 by .25 to .50 a point up to 1.5%. (Remember, the central bank lowered their lending rate to near zero in late March to help the economy.) This will slow sales till consumers realize rates are not coming back down.

What will inflation be in 2021? With real estate doing so well why is inflation still considered low?
 We know that inflation causes our costs to go up. So how do they measure inflation? The Bureau of Labor Statistics prices everything consumers spend money on. Then all of the expenditures are categorized and weighted based on the amount that the average consumer spends on those categories. The percentage change from month to month is the rate of inflation, and it is usually expressed as an annualized number.

The inflation rate represents everything people spend money on haircuts, plane tickets, medical care, clothes — you name it. But that number is puffed up by the pesky necessities — food and energy. So those two categories are discarded when calculating the core inflation rate. Now think about that. How many haircuts, plane tickets, clothes, dress shoes or pants or anything dressy have you bought this year. We have not, therefore those industries are chasing the consumer offering their product at no appreciation. Because we are not spending money, inflation has been kept low.

Notice I did not include shelter / real estate in things measured. Why? Real estate is a hard asset, like gold, silver, etc. Although demand drives values up or down in hard assets it’s not as volatile. Most hard assets can maintain their values unless there is an unusual desire for that hard asset to drive the value up.

As stated earlier, there will not be enough shelter to keep up with job growth in most of our Texas metros values will stay robust, but inflation will remain in the low single digits due to lack of spending on those items listed. Think about it, when I the last time you bought new nonathletic shoes, dress slacks, how many times did you go out to eat in 2020, etc.?

Where will the unemployment rate end up in 2021? Will job creation be as strong in 2021 as 2020?
 As we have found out in 2020, lots of factors affect unemployment rates. COVID surges, employer shutdowns because of COVID surges, you get the idea. After record unemployment in early 2020, the possibility of that happening again in 2021 is remote. However, as 2020 showed us, anything can happen.

And remember going into 2020, we were at record low unemployment rates

The Federal Reserve this month (Dec. 2020) predicted the U.S. unemployment rate would fall faster in 2021 than it previously believed, but it stuck to a cautious forecast for the broader U.S. economic recovery. A few months ago, the Fed had estimated the unemployment rate would decline to 5.5% in 2021. In 2021 it should fall to around 5% nationally.

The official unemployment rate slid to a new pandemic low of 6.7% in November and has declined a lot faster than expected, but economists also say it likely underestimates the true number of jobless Americans by about 4 million. In any case, the Fed’s outlook for unemployment also suggests the central bank thinks the damage from the latest — and biggest — coronavirus outbreak will not do lasting damage to the labor market.

Layoffs appear to have gone up in the past month and companies have scaled back hiring plans to cope with new government restrictions and a decline in consumer spending.

The good news is The Fed slightly raised its forecast for economic growth next year to 4.2% from 4%, indicating continued caution on the part of central bank officials as they wait to see how effective the new vaccines for the coronavirus perform. The vaccines began rolling out in the past week. With stronger economic growth comes lower unemployment rates.

By 2023, the Fed expects the jobless rate to fall back to 3.7% and return close to pre-pandemic levels, showing the central bank thinks the economy will return to normal over the next several years. Five members of the Fed’s policy-setting board even think the bank will raise interest rates in 2023.

Austin, San Antonio, and DFW unemployment will be somewhere between 2.7% and 5% by the end of 2021. Houston will struggle for a couple of years near 7+%. In all our Texas metros record reemployment should be what we see as more industries come back online.

How much will the economy grow in 2021?
 Nationally it will be uneven, but on average as stated above, somewhere between 4% to 4.2%. Many industries will continue to be challenged. Hospitality, leisure, and retail come to mind with little to no growth. But their lack of growth will be more than compensated by tech and service companies’ growth. Those Texas metros such as DFW, Austin, and San Antonio will benefit from somewhere between 3% to 5% growth in 2021.

What will commercial real estate due this next year?
 To be discussed at a later date……

Synopsis:

First, realize that The COVID recession forced 1 out of 5 businesses to go out of business. Most of this bad news is focused on the hospitality, leisure, and retail industry with higher ratios, more like 1 out of 4. However, warehouses, multifamily, and offices are at the other end of the spectrum with growth in the near and far future.

Downtown office space desirability will not disappear as many predicted, but values will plateau a while as surrounding businesses recover. Most metros commerce is still centered in their downtowns, which does not change overnight due to COVID.

The suburban commercial market will gain traction, multifamily was already there, but suburban office and warehouse will continue to see gains.

With all this demand are we creating a bubble in 2021?
 With values increasing exponentially and inventory dwindling, isn’t this a bubble? Isn’t this what happened before?

First, if the residential real estate market was going to tank, it should have been in 2020 with job losses, businesses closing, etc. So how / why is the market different this time?

This is not a historical normal recession. It has become a ‘suppression of work. Those that want to work cannot, because of COVID shutdowns and protocol. Many have become dependent on government stimulus, because of the forced inability to work. This recession is uneven/unfair. It will be a ‘K’ shaped recovery nationally, regionally, and locally. The top half of the ‘K’ is still able to do their jobs, make a good income, not spend as much because of the COVID protocols. This makes up 80+/- of the population. The other 20+/-% are working from paycheck to paycheck, historically multigenerational in the same household, childcare is a burden, etc. this portion of the population is combining households, looking for alternative work and in all likelihood have no health insurance. The bottom half has a shelter, but the long term could become an issue.

So, what about the top of the ‘K’?

Strong demand. The national, regional, and local housing market was on strong and stable footing going into the current pandemic situation. In the Texas region, there was not enough housing shelter going into the COVID lockdown. And yes, it slowed to a crawl back in April, as the seriousness of the coronavirus pandemic set in. the good news is the spring selling season was pushed into the summer causing a record year. Many looked to move up or at least improve their current situation, sometimes with a second home. In turn, this has created a lot of “pent-up demand.” as economists call it. Now, we are seeing that demand unfolds in the form of steady home sales nationwide through 2021.
Low rates. Two weeks ago, the average rate for a 30-year fixed mortgage loan dropped to an incredibly low 2.8%. That was a record low at the time, the lowest average rate in 50 years of record keeping. And rates are expected to remain low well into 2021. These trends have motivated home buyers, boosting demand and prices alike. The current administration is talking about ‘first-time buyer tax credit’, which in turn will continue to put more pressure on values.
Secondly, we are not seeing speculation financing as we did in the ‘great recession’. Although rates are low, they still require stringent qualifying, particularly for investors preventing the market from going being built on speculation……
Low supply. During the last housing market crash, many cities in the U.S. had a glut of homes on the market. Driven by speculation and a nationwide real estate boom, builders were cranking out homes at a frenzied pace. In 2021, home buyers will encounter the opposite — a shortage of properties. There simply are not enough homes on the market to meet demand, and that puts upward pressure on prices.
Qualified buyers. Many Americans lost jobs during the pandemic, an unfortunate trend no matter how you look at it. But those losses have not affected the U.S. real estate market very much. Many of the people who lost jobs in 2020 were working in the hospitality and services industry, typically at the lower end of the wage spectrum. They were predominantly renters — not home buyers. At present, there are still plenty of well-qualified homebuyers in the market.
Job creation. You cannot sell homes if you do not have the buyers. Buyers have to have a job. The nation continues to rebound, but the Texas region has had the quickest and largest reemployment of metros across the nation. The same thing happened in the ‘great recession’ helping Texas residential real estate.
2021 could be another record-breaking year, the only caveat holding the regional markets will be lack of inventory.