The ambitious plan to recharge our economy.
James Carville famously quipped, “It’s the economy, stupid.” He meant, what voters really care about in that election cycle or any is the economy and how it impacts them. The more confident and optimistic Americans are about their current economic situation, the more likely they are to vote for the candidate they feel can influence their standing. Economic uncertainty has a ripple effect that can be felt no matter what industry you work or invest in. The reality we deeply understand is that consumer confidence is the base of all economic prosperity. The fundamental aspect of that confidence for most Americans is job and housing security.
Housing confidence and a strong real estate economy is not a red or blue thing — it’s an American thing. We face a correction that doesn’t care which side of the aisle you are on. We win or lose as a whole.
In Part 1, we explore the impact of the real estate market, consumer spending, the wealth effect of the value of your home, and what this all means to the economy when explored from a macroeconomic view. In Part 2, we lay out how to address these large systemic issues for the benefit of all.
Real estate and GDP are inextricably linked. Real estate remains our country’s largest economic driver for decline or growth and recovery. Fannie Mae, the largest federally mandated insurer of mortgages in the US, predicts we will experience a 15% drop in real estate sales in 2020. According to the St. Louis Federal Reserve, as a factor of real GDP — $2.4T comes from real estate of the total $17.2T.
Real estate drives 13.9% of total US real GDP if not more.
What does this really mean? The real estate economy today is dramatically different than the one we faced in the crash of 2008. In 2020, Americans have more equity in their homes than before, yet don’t be surprised — it’s not that much more. Nearly 73% of home buyers put 20% or less down when they buy a home.
Consumer spending accounts for 70% of all economic growth in the US, according to Inc. and a survey conducted by Fortune.
Like Best Buy, many retailers are reporting increases in overall consumer sales that have led to hiring and needed revenue. Yet, we are still facing a reality that many don’t consider with the economy: the wealth effect. This economic driver is not that complex when you think of it this way; if consumers feel less wealthy or face economic uncertainty, they spend less. Research shows you can quantify this effect when it comes to the asset with the most value for the largest number of Americans— their home.
Karl Case and Robert Schiller, creators of the Case-Schiller Index, reported — unlike increases in the stock market — housing prices have a far greater effect on the US economy via spending. For every $1 increase in housing wealth, it creates a 2.5X increase in overall consumer spending when compared to stock market gains, according to Moody’s Analytics. This indicates for every dollar of housing value appreciation, $.05-.08 goes to increased consumer spending.
Home sales, affordability, and the percentage of total income dedicated to housing are the biggest early warning signs in real estate softening. What happens when we start to see the US real estate economy flagging? Earlier, we shared that Fannie Mae predicts housing sales could be down as much as 15%. Home values have increased dramatically over the past 20 years — representing 85% growth from an average of $207,000 to $383,000 — since 2000. Wages have come nowhere close to seeing a similar improvement.
Of the 139M housing units in the US, only 43M are occupied rental units with another 10.7M vacant. According to the Realtor.com June 2020 Housing Forecast 64% of Americans own their home. For most of us, this is our largest source of wealth and is a base of tax benefit providing economic, living, and family stability.
Homes in the US remain unaffordable for most Americans, with a huge percentage of the population spending more than half of their income on housing. These indicators show some of the early warning signs of what may be to come. When a family can’t afford their home, it creates unforeseen consequences in the entire economy.
Valuing the US real estate market provides an important window of insight. As a country and economy, we have already started to see a decline in overall real estate sales, a tightening in lending guidelines, and the disheartening prediction of a decline by nearly 6.6% of the total value of the residential real estate market between now and May of 2021 according to Barrons. That would be the greatest year-over-year price retraction since 2009.
Consumer spending is a major concern with a change in home values. The current valuation of the US housing market stands at $33.6T, according to the LA Times. This could mean a decline in wealth of nearly $2.2T for average Americans. The size of that change in wealth may represent — at a minimum — a reduction in consumer spending of $176B. This doesn’t account for the ripple effect in the loss of jobs or downward pressure on essential services like lending and insurance. The distinct possibility of the increase in foreclosures compounds this effect by tightening credit availability and decreasing liquidity for all borrowing.
Real estate doesn’t just mean homes and condos. The commercial real estate market is currently valued at $16T, according to NAREIT. This sector has experienced significant softening as many core areas — particularly retail and office space — have seen declines due to COVID related changes in business and consumer behavior. Work-from-home and decreased onsite purchasing have affected owners of office buildings and retailers more than others in commercial real estate.
Forty-nine trillion dollars in value in the residential and commercial real estate asset class is hard to fathom. It’s a large number by any account, especially when considering the total US real GDP is only about $17 to $20T annually. With an opportunity of this scale, what do we do about it?
In economic recovery, the longstanding belief has been that investing in our manufacturing base is the place to spur growth. Our largely service-based economy means investing in growth in multiple sectors must be done in order to create a similar large scale impact.
The US real estate market operates in a way that is similar to how manufacturing in our country once did. It drives labor and job growth at every socio-economic level, impacts nearly every industry from retail to finance, and creates value for all Americans. We all need a home, and real estate offers multiple entry points for those transitioning from other industries. It is where we can invest and drive the most value for flattening the curve and stabilizing all interdependent sectors that rely on this economic engine.
In the shortest amount of time, we must do the most good with the greatest impact on society and grow a strong business. It is the American dream revisited. Recently, I asked if the American dream was still available to all. Perhaps I was wrong when I said that it wasn’t. A wise man once reminded me— “you aren’t always wrong, but do you have to try so hard to prove that you are right?”
In this case, I will do everything I can to prove that I was wrong — the American dream has to be alive and well. It will take work, just like it always has.
The Economic Recovery Begins Now: Part 2 is where we lay out an aggressive plan to coordinate government entities, technology firms, real estate experts, lenders, and other well-known companies not often thought of as part of the real estate industry to accomplish a bold objective.
We intend to stave off downward US economic pressure and even more. We look to accomplish this through a complex program of buying homes, real estate related assets, debt and creating thousands of jobs through a network of believers in this objective.
The main goal is to keep Americans in their homes. It’s ambitious, and we seek to accomplish many key objectives in one strategy. For the partners we hope to work with, the mission is one where no single entity can do it alone. It will take all of us — and you — wining and working together.
Click here for Part 2.