The K-Shaped Recovery: What Is It?

You’ve probably heard of a W-shaped recovery, even if you don’t know what it means. This refers to a false start in recovery, whereby the economy is improving in one sector, but doesn’t have the momentum to continue recovering, so it wobbles a bit. This has been what experts believed the current recovery would be like. Now, though, some people are wanting to call the recession and recovery K-shaped. What does this mean? It means that some sectors will recover and retain their momentum, while other sectors haven’t yet left the recession and continue downward. In other words, the recession has very clearly disproportionately affected various groups.

More specifically, this recession has had comparatively little impact on wealthy individuals. People with higher paying jobs are more likely to work in fields that can be done from home, so they haven’t been out of work during the pandemic. People who have the capital to invest in stocks as their primary means of income don’t have to worry so much about the pandemic, since stocks can’t get sick. They’ve actually been on an upward trend since before the lockdowns even began. Even those higher-income workers who did experience losses won’t have as much necessary expenditure proportional to income as those living paycheck to paycheck. This means that the recession has significantly widened the already large income inequality gap.

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More: https://journal.firsttuesday.us/2020-recession-stretches-income-inequality/74733/

Real Estate Speculation Expected to Rise

As with any recession, at some point the direction of prices is going to change. In most cases, real estate speculators purchase at low prices so they can later sell at a higher price. Currently, speculators are most likely to be sellers, not buyers, since home prices are already high, and are expected to decrease in 2021 as sales volume continues to drop. Once prices start dropping, as buyers are waiting for prices to bottom out, sellers are looking to sell as quickly as possible to get the most money. With more seller willingness, buyer speculators are also coming in 2021.

Given the current high buyer demand, a sudden increase in seller willingness is going to look like the beginning of a recovery. Don’t be fooled by this. Speculators are generally people who can afford to be wrong. This increase in activity is not going to be a result of a stabilizing economy, but of opportunists who were largely unaffected by the recession wanting quick sales. Speculators generally only constitute 20% of buyers. For an actual recovery, the rest of the populace needs a stable income. That means job recovery, which isn’t expected until 2023.

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More: https://journal.firsttuesday.us/prepare-now-for-the-return-of-real-estate-speculators/73795/

Job recovery will be slower than expected

Reports demonstrate record job gains in California in the last few months, nearly 700,000. But that doesn’t mean we’re actually making new jobs. It means that we lost so many jobs this year that even recovering a small percentage of them is going to look like a large number. There were actually over 2.7 million jobs lost in California between December 2019 and April 2020, significantly more than were lost in two years during the 2008 recession. So we’re still a long way off from returning to the December 2019 peak, let alone generating new jobs.

Federal assistance has been necessary to keep the economy floating, but it’s also been inadequate. We’re going to need a lot more help. A COVID-19 vaccine is a solid step, allowing more people to return to work. It’s not going to be enough, though, since the economy was already on a downward trend before COVID-19 — recall that the peak was December 2019, three months before the lockdowns. The recovery is expected to be W-shaped, with some unstable gains from now through 2021, and no clear upward trend until 2022 or 2023. Even then, job recovery will have just started, and the real estate market is going to need even more time after jobs start back up.

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More: https://journal.firsttuesday.us/job-losses-will-inevitably-continue/73104/

Despite fierce competition, it’s not indicative of recovery

Throughout California, homes are selling quickly. 46% of homes are on the market less than two weeks. Using data from Redfin, 54% of offers were contested. The breakdown by region is 67% in the San Francisco/San Jose area, 65% in San Diego, 58% in Los Angeles, and 47% in Sacramento. However, don’t mistake this for a healthy market — we’re still in a transition period.

The actual reason for low days-on-market is a combination of high buyer demand, due to low interest rates, and low inventory. Those who are able to buy correctly recognize this as a great time to do so if you are able to afford it, and are scrambling to get at what few properties are available for sale. Even the high demand, though, is merely high relative to inventory — there still aren’t very many people who are able to afford a purchase right now. Whether or not we get a COVID-19 vaccine before then, the housing market won’t properly right itself until the job market stabilizes. The expectation is that this won’t happen until 2022 or 2023.

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More: https://journal.firsttuesday.us/summer-2020s-unseasonably-hot-housing-market/72921/

Here’s why house prices are still high despite the recession

It may seem intuitive to look at past recessions, such as the one in 2008, to predict the market during the current recession. But that doesn’t always work, since the circumstances surrounding the downturn may be different. In 2008, what caused home prices to drop was reduced buyer demand and increased foreclosures and short sales. Now in 2020, that’s not happening.

Buyer demand is actually relatively high right now, as a result of interest rates being low. The Fed decreased interest rates in 2019 in expectation of a recession. They were right, of course, but couldn’t have predicted the exacerbating effect that COVID-19 would have. Interest rates can’t get much lower without the Fed going negative, so the market doesn’t have anywhere to go. Foreclosures may be on the horizon if federal and state governments don’t maintain protections. But for the time being, there’s a moratorium on most foreclosures, so there’s no need to drop home prices. Another factor is the lack of construction. With fewer homes being built, especially in the form of affordable housing, low inventory means there’s no competitive pressure on sellers to reduce prices.

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More: https://journal.firsttuesday.us/letter-to-the-editor-why-are-prices-still-rising-even-though-were-in-a-recession/72735/

Predictions for the 2020 recession’s impact on inventory

The real estate journal First Tuesday asked readers in July how they felt the 2020 recession would impact for-sale inventory. The votes are now in.

A plurality of respondents, 45%, felt inventory would go down. This would likely be a result of both anxiety from sellers and not enough construction. However, the number who instead felt construction would increase and there would be rental vacancies, leading to more listings, was 39%, not too far off from the plurality. The third and final category, those who felt there would be little to no impact, totalled 16%.

But that was July. It’s now August, and there certainly has been an impact. It turns out the 45% were right. Inventory has declined steeply, and construction companies are even more wary about building than they already were before the pandemic. Fortunately, declining rental vacancies points to an increase in inventory as soon as construction starts back up. Changes to California zoning laws also hope to speed up construction.

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More: https://journal.firsttuesday.us/the-votes-are-in-how-the-2020-recession-impacts-californias-for-sale-inventory/72705/

Housing Recovery Will Take Both Time and Action

According to a recent poll of readers of the Real Estate journal First Tuesday, the most optimistic recovery date from the current recession is late 2020, with 30% of respondents hopeful for a quick rebound. A quarter of respondents believe that recovery will be tied to a COVID-19 vaccine, which is predicted to arrive no earlier than mid-2021. 45% don’t expect recovery until 2022.

Benjamin Smith of First Tuesday agrees that a COVID-19 vaccine is important to recovery, but warns that there are other aspects at play. Real Estate as a business does depend heavily on in-person interactions, even though much of the work can certainly be done online or via email, and lockdowns have, without a doubt, slowed down business. Smith is careful to note, however, that the market was already on a downturn before COVID-19 hit, merely speeding up and exacerbating an impending recession. Two important factors in the downturn were falling inventory and insufficient construction.

While a vaccine can help open up agents, buyers, and sellers to safely meet up and discuss business, the underlying causes still need to be addressed, and people will need time and government intervention to recover their finances. This places recovery almost certainly later than mid-2021, and very likely further out. Fortunately, low interest rates mean buyer purchasing power will be relatively high once they regain their financial stability, meaning home prices aren’t likely to suffer as long as interest rates remain low.

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More: https://journal.firsttuesday.us/the-votes-are-in-housing-market-slated-for-a-late-recovery/71917/

Recession Chatter

The New York Federal Reserve Bank shows a probability of 33% for a recession to strike in the next 12 months.

A recent Zillow survey of economists and other experts predicts a 52% chance of recession by the end of 2019 and a 73% chance of recession by the end of 2020.

Morgan Stanley economist Chetan Ahya estimates that the trade war with China and threatened increased tariffs, “could wind up in a global recession in about three quarters.”

Sounds very ominous. Of course, the fact it does sound ominous reinforces our tendency to talk about it. Then repeatedly hearing the conversation inflates the concern in our minds. Per Citigroup CEO Michael Corbat, the single biggest threat to the U.S. economy is, “Our ability to talk ourselves into the next recession.” (A Reuters article in April discussed ways in which those in the investment industry avoid using the ‘R word’ to minimize concerns on the part of investors.)

So what prompted this forecast of recession?

One of the key indicators used by many is the ‘inverted yield spread,’ also known as an “inverted yield curve.” Campbell Harvey, a Duke University finance professor first linked yield curve inversions to recessions in the mid-1980s. An inversion lasting three months has preceded the last seven recessions, per Harvey. “From the 1960s, this indicator has been reliable in terms of foretelling a recession, and also importantly, it has not given any false signals yet,” he said.

Without going into a lot of detail, a simple way to think of the inverted yield is this: Typically, a short term loan carries a lower interest rate than a long term loan. It’s logical, in that we are much better at forecasting events over a short term like three months, than we are over a long term, like 10 years. And that is exactly what changed late in March of 2019. It became cheaper to borrow for ten years, than for three months. It was the first time since mid-2007 that the yield curve had flipped.

Whether now or later, it is inevitable that a recession will come. That’s the way our economic system works. And preparing for the inevitable is simply wise. We recommend you evaluate your financial position in light of the possibilities and plan to protect your assets. If we can help with real estate information and valuation, don’t hesitate to call.