"We can't control the wind, but we can adjust the sails."
I don't sail much any more, but that adage definitely speaks to me as I reflect on what we've all been faced with over the last six weeks. I am a self-confessed data geek who has been studying real estate markets for more than 30 years, monitoring economic indices to develop forecasts as to how those changes could influence consumer behavior. That research is ingrained in my daily routine, but over the past five weeks, the volume of information related to the economic impact of COVID-19 has been dizzying. I have attended more webinars, conversed with more economists, read more briefings and reviewed more surveys than I can count.
I admit to being obsessed with data parsing and analysis in an effort to understand how economic and financial impacts will shape the future in the club industry and the residential real estate market, both short term and long term. Within all that information, consensus builds around three main variables used to assess the changing situation:
Epidemiology – What is the daily rate of total COVID-19 cases by country, what is the mortality rate by geography, and when will the current growth rate of confirmed case diminish? The current growth rate in the U.S. is beginning to flatten due to the rapid increase in testing, social distancing and travel limitations.
Government Stimulus – The Federal Reserve and all the world's Central Banks are providing stimulus to relieve financial stress and improve economic activity. The magnitude and speed in which this virus has spread globally require fast and decisive action to prevent a more prolonged economic contraction.
Policy Decisions – The policymakers of each country are working collaboratively to manage the crisis. They will be the key to curbing the spread of the virus and getting their economies back on track as quickly as possible.
Before we can adjust our sails as the metaphor suggests, it is important to take stock of the wind. Let's dig into a few key factors that should be considered.
GDP Growth in 2020
There's good news and bad news here, and I'll give you the bad news first. Based on the information reviewed, most economists expect Q1 2020 GDP to be negative by 1% to 2%, with the majority of quarterly loss allocated to March when business shutdowns began. The second quarter of 2020 is where we expect to see the worst of the crisis, with contractions ranging from negative -15% to -35%, many forecasting near the mid-range or between negative -20% and -25%. For historical reference, the worst one-quarter loss in GDP was recorded in the third quarter of 2008, at -7.2%. Most economists expect GDP growth to rebound in the third and fourth quarter of 2020, albeit from a significantly lower base and at a much slower pace.
Now for some good news. Most economists expect a "V" or "Checkmark" shaped recovery, meaning it will be a short-lived, significant double-digit drop in GDP in Q2 2020 with slow increases over the following three quarters into mid-2021. Once COVID-19 confirmed-case growth begins to diminish and the economy is getting back on track, we can start to measure the behavioral and societal changes that will shape the future.
Employment Growth in 2020
“Jobless claims” are a statistic reported weekly by the U.S. Department of Labor that counts people filing for unemployment insurance benefits. Those claims include furloughed and laid off employees seeking unemployment benefits, but who are technically not unemployed. Claims are not the same as the actual number of unemployed, but they are considered an important leading indicator on the state of employment and the health of the economy.
As of April 23rd, jobless claims had increased by 4.4M, bringing the total to 26.5M. That number represents 8% of the estimated population in the U.S. as of April 2020 which is roughly equivalent to the population of the entire state of Texas. Earlier in the month, the April 3rd employment report revealed 700,000 jobs lost in March which changed the unemployment rate to 4.4% from its prior rate of 3.5%, but we know the March data is skewed to the low end since the unemployment survey is completed in mid-month and doesn’t reflect concentrated job losses in the second half of the month.
If we assume actual job losses are 20M of the total 26.5M initial jobless claims that include furloughed and laid-off workers and use the March 2020 civilian labor force estimate of 162M, the effective unemployment rate is more than 12%. Most economists anticipate unemployment will peak at around 11% to 13%, with some forecasting short-term unemployment rates reaching the mid-teens or low 20s.
Local Economic Drivers
The major drivers of the local economy are the best measure of your club's success in the future. Many markets in the United States are supported by the Hospitality and Leisure, Restaurant and Retail Trade industries, all of which have been severely impacted by the COVID-19 shutdown. Markets that rely on oil and gas production have also been impacted, with the cost of production exceeding the current price of a barrel of oil. This situation intensified in early March when rapid increase in oil supply by OPEC and Russia coupled with shrinking global demand pushed pricing down. The good news for the broader market is that gas prices are near historic lows which will ease household expenditures during this time of employment uncertainty.
As each state begins to reopen its economy, retail stores and restaurants will be the first businesses that consumers patronize. The experience will likely be different, but the value of social interaction will generally be the same.
Residential Real Estate
All aspects of Real Estate are being impacted as home buyers and sellers are unable to facilitate transactions and homebuilders are forced to reduce construction activity due to lower sales traffic. Participants in the real estate market will take a 'wait and see' attitude as everyone reassesses their current situation. Mortgage rates at historic lows will entice some owners and buyers to explore the opportunity of refinancing or leverage; however, lender requirements have significantly tightened to account for the increased employment risk and uncertain market risk.
This period of inactivity will no doubt impact the value of residential real estate in the short term, similar to the housing decline noted after 9/11. It is unlikely (but not impossible) that this period will last more than 18 months. It is important to note that there are numerous differences between the current situation and the great recession. In 2008, the intertwined financial system and housing industry were the root cause of the dramatic decline in real estate values. In the current situation, the economy was structurally sound going into the crisis, which should help mitigate any significant long-term value declines.
Real Estate in Residential Community Clubs
Residential Community clubs around the country have done an incredible job of adapting to the changes in ways that are helpful to their member-owners. The rapid adoption and communication of innovative programs and services will contribute to lifestyle and marketability of housing when consumer confidence levels return.
Many factors influence the marketability of real estate in community clubs. Whether you're a club manager, a board member or a member, now is a good time to think about how these factors impact your club:
Membership structure and annual cost of ownership – What is your membership structure? Mandatory golf or voluntary golf? What is the annual cost of ownership? Sensitivity of the annual cost of ownership as it relates to the home price/value equation may impact some homeowners in the short term.
Typical buying and selling season – When do you typically sell the most homes and memberships? April through September 2020 will likely be the period most impacted in 2020, with the fourth quarter being a period of transition and 2021 being the period of reassessment.
Residential product mix (Single Family vs. Multi-family) – The size and mix of housing allows members to move up or down within the community. It also broadens overall market appeal as the cost/lifestyle ratio allows for more opportunities to stay within the social framework of a club.
Property age – Most people don't like projects, so the newer or more updated the product, the more marketable it will be.
Amenities and cost of belonging (over and above the cost of ownership) – The cost of ownership includes mandatory fees required to operate and manage the club and/or master property owners association. The cost of belonging is the voluntary membership cost over and above expenses required to live in the community.
Member age and income demographics – COVID-19 has had an impact on all members within a club, regardless of their age or income. Members who are older or may have more market-sensitive monthly incomes may have increased urgency to sell their properties in order to reduce expenses and preserve wealth. The impact of the virus is situational and is expected to be short-lived, thus our opinion is that homeowners should monitor the market over the next three months and reassess their personal situation at that juncture. The next wave of buyers for club communities is currently assessing future decisions based on the impact of the virus; strategic home sellers will do the same.
How Will You Adjust Your Sails?
The current disruption is temporary and nobody knows exactly what the new normal will look like, but market data will continue to light the way as the situation unfolds. Based on what I've observed, the industry’s response has been pretty remarkable. Many club leaders are using this crisis as an opportunity for incredible innovation and even reinvention, taking advantage of the chance to showcase the value and sense of community club membership provides. I believe those efforts will make all the difference in what life looks like "on the other side."
Michael Timmerman is Chief Market Intelligence Officer for Club Benchmarking. Prior to joining CB in January of 2019, he was Senior Vice President of Meyers Research, a national real estate advisory and data technology firm. He holds a bachelors in Economics and he is a CRE member of the Counselors of Real Estate. Mike enjoys serving clients across the country from his home base in Naples, Florida. He can be reached at firstname.lastname@example.org