COVID-19, work-from-home mandates and civil unrest have created a perfect storm for our nation’s major urban areas.
A near total shutdown of economies due to COVID-19 has choked the vitality that has made urban areas so popular. Jobs and income have been lost due to the closing of thousands of stores and restaurants—some never to reopen. Let’s not forget that tax revenues are declining. These revenues provide the services that citizens depend on in these cities.
The shift to work-from-home, which will likely become a more permanent part of the workforce, separates the where I work from the where I live. What percentage of the workforce will have this option is unknown. Regardless, how many families will give up the action and vitality of living and working in a major city for the lower costs and slower pace of suburbs or even ex-urban or rural lifestyles?
As if this weren’t enough, in certain urban areas, civil unrest has caused many more to consider relocating to suburban or rural areas. Some families are buying getaway homes, so they have options. Others appear to be decamping permanently, whether it’s due to COVID-19, civil unrest or the high cost of living and taxation. Anecdotal evidence suggests that the wave of those relocating permanently is large enough to be called a significant demographic event. Time will tell.
Future Views Have Changed Dramatically
What occurs to me is that none of this was in the thoughts or future views of Americans just seven months ago. It’s amazing how one event, which triggers other events, can cause such disruption and such a foundational change in how our economy operates. For instance, while Amazon and online shopping services were eating away share from traditional brick-and-mortar retailers, the events of the last seven months have pushed hundreds of mainline retailers into bankruptcy and untold numbers of smaller, privately owned retailers to close, some permanently.
We have a housing sales boom, fueled by the delay in the normal spring market and record low interest rates, as well as additional demand coming from those who are either buying second homes in the suburbs or countryside, or permanently relocating away from urban core communities. When combining already low inventories of homes for sale with this uber-demand, it creates a market critically short of for-sale inventory in many markets around the country.
A question we get asked often is: What’s next? We don’t know; no one does. The economy is slowly adding jobs, but there are large segments of the workforce that won’t see any quick recovery, such as travel and tourism, state and local governments, retail and restaurants. The current 8%-10% unemployment rate is a fair distance from the 3%-4% the country had in February 2020.
How will this affect housing sales this fall and into next year? Certainly, anyone paying attention knows that the elections this fall—no matter the outcome—will cause more unrest. The pandemic will also continue to restrain our country’s economic recovery.
The homeownership rate rose to the highest rate since 2004 in July and was at or near record highs for virtually every demographic group. How much room does it have to run? The peak in 2004 was over 69%. We are halfway between the 30-year average rate of about 64.5% and that level—which preceded the housing crash of 2006-2010. There are substantial differences between the circumstances of that homeownership peak and today’s circumstances.
Thankfully, most of today’s reasons should discount another crash. Yet, it’s disconcerting to think that with the level of unemployment in the country today, how in the world did we get the highest homeownership rate in 16 years? I trust some very smart people are watching carefully. The recent fee increase proposed by Fannie Mae and Freddie Mac, while evidently only on refinanced mortgages, may be caused by policy makers to cool things down a bit. That’s not what they say it’s for, but one wonders.
When we talk with our clients, we suggest that, since there are so few answers to these questions, the most important thing they can do is focus on building stronger relationships with family, friends, clients and customers. Preserve cash and liquidity, because we know from past downturns (We’ve had a front-row seat for four of them) that great growth opportunities are just over the horizon.