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The most ugly economic data in U.S. history will continue to stream over the next few months. There’s no way around it with the sudden shutdown of around one-third of the economy. In the first few weeks of the COVID-19 pandemic, unemployment claims were off the charts—five times higher than in previous recessionary times.
Whether the GDP contracts by 10% or 25% in the second quarter does not matter much. Keep an eye on how fast the economy recovers and when that will begin. In addition to the relief provided by the $2 trillion stimulus package, the Federal Reserve is all-in to provide liquidity so that mortgage and small-business loans and grants can quickly reach people.
Let’s remember that before the outbreak, the economy and the real estate sector were on rock-solid ground and headed for further gains. While the hits we’re experiencing stemming from COVID-19 are shocking, they aren’t permanent. One key area of resiliency will be home prices, which had been rising for 94 consecutive months on a year-over-year basis. Unlike the stock market, prices do not quickly swing but possess a certain stickiness. An exception was during the Great Recession, when subprime lending blew up as consumers overstretched their budgets. This was combined with overproduction by homebuilders. The huge oversupply during that time cut home prices by a third nationwide.
Fortunately, subprime loans are no more as borrowers must meet strict ability-to-pay criteria. Homebuilders have been underproducing for over a decade, which is the reason inventory shortages have persisted widely. Home prices should be steady even in the face of short-term economic damage.
As for the future, the economy will come back even if business tactics change permanently: more use of virtual tours, electronic signatures, and hand sanitizer. While predictions about the timing of the recovery are difficult to make (it may take until the fourth quarter of the year or well into 2021), hang in there through the ups and downs. The stimulus, along with American resiliency, will pull us through.
