Economic correction affects us all. This crisis is my third to experience up close in the industries most affected. As the Managing Director of a real estate investment fund and part of the leadership team at a Fortune 500 real estate technology firm, it is my role to study the reality we face in excruciating detail. Understanding our most fundamental economic drivers simplifies where we are in the U.S. to separate fact from conjecture.
The macroeconomic factors at play are most dependent on how money moves. Housing, employment, and government spending are the crucial elements that make up the U.S. economy and the likelihood of a fast recovery.
Housing is the majority of American’s most considerable monthly expense. Borrowers and renters who can’t pay their mortgage or rent for more than 60 days rarely catch up on payments and recover. Banks have no incentive to help. This report from the Federal Reserve Bank in Boston sums up our first critical fact when examining the data from the Great Recession. Banks have a low incentive to help a borrower stay in their home.
Once a mortgage exceeds 60 days late, the chance of ever getting back on track only amounted to 30%.
The “cure rate” has little to do with whether or not the borrower received assistance or loan modification. Banks expose themselves to more risk to go through the labor of loan modifications beyond what they have already done in our current government-mandated forbearance. Of those seriously delinquent loans, 30% of the borrowers will self-cure, and the rest will just make their losses even more significant — so why try?
When tenants can’t pay their rent, this only creates further strain on the housing economy. In April of this year, 31% of tenants in the U.S. could not pay their rent, according to the N.Y. Times. The appearance of relief from bailouts and forbearance programs is just kicking the can down the road. Borrowers and tenants who can’t pay their rent or mortgage will not suddenly have the ability to spend several months at once when forbearance ends.
With growing income disparity in this country, according to the Joint Center for Housing Studies at Harvard University, a quarter of the nation’s 44 million renter households paid over 50% of their income in rent in 2018. A Federal Reserve report showed:
40% of Americans would struggle to manage even a sudden $400 expense.
The inability to afford housing payments for renters and mortgage holders sets off a domino effect as it did in 2008, exacerbating the economic crisis. If you can’t cover the amount for your most essential living expense, this means the only relief comes from finding income through a new job.
Unemployment numbers are coming at a breakneck pace in the media, and many have seen this chart plunging downward with an unprecedented number of unemployed Americans. Even more concerning, is how much it understates the issue. The unemployment rate is limited to the number of jobless that are still actively seeking work. With any metric, when you reduce the total number of a population, the degree of the devastation may be far worse.
The current unemployment rate doesn’t take into account the number of Americans who believe they are on temporary leave or have given up looking for work altogether. Our modern gig economy adds another element understating the real data in this equation. The next chart shows the number of ‘employed’ or those that are part of the ‘actively working or seeking work’ segment of the U.S. population as a whole.
This chart shows that only 51.3% of adult Americans are considered in the employment-population because such a significant number of people have given up looking or are not part of the labor force calculation. Until recently, we had 63% of the adult population in the labor force. Let’s look at it another way.
In the past 80 years, peak unemployment has previously been no higher than 10.8%. We are currently at 14.7%, with 20.5 million unemployed. That would imply that the total labor force is 139.4 million. Until recently, it was 172.6 million. That disparity accounts for over 33 million Americans that are suddenly out of the labor force. Many of these individuals will not return to their previous jobs. If we optimistically assume 50% of those jobs are still available, it leaves us with a sobering statistic.
The real number of unemployed may be closer to 37.1 million meaning unemployment rates could be as high as 21.5% today.
We have a society in the U.S. barely making ends meet and living paycheck-to-paycheck when the economy was thriving. The hope, for many, is that we will be getting back to business and pre-crisis life soon. It is nearly impossible to conceive that companies will be able to quickly rehire tens of millions of workers no matter how bullish they are on growth.
Government spending in response to the crisis has been swift and at staggering dollar amounts. The U.S. has been quick to assist, and it has come at an alarming pace and cost.
A massive cash infusion of tax dollars to attempt to stave off the economic crisis may have been necessary. There should be little expectation we are going to be able to rely on the United States government to continue having unlimited credit to draw from for more bailouts. It has already surpassed what is remotely reasonable.
We are already at WWII levels of total debt in relation to US GDP.
The federal debt works out to $76,284 for every person living in the U.S. or $195,540 for every household in the U.S. That figure is a staggering $25.1 trillion. The debt already makes up a considerable percentage of global GDP — nearly 29%. There is a limit to how much even the most influential country can borrow.
Systemic issues in the U.S. economy are not going away, no matter how much we want them to. Once we step back and eliminate conjecture and focus on facts, we should prepare for a long slog as a society. Taking a good hard look at the options in front of us is healthy and long overdue.
There is no doubt that a fast recovery will not be coming this time. That is certain. The U.S. economy is strong in many ways, and we have the opportunity to look to new models for the future. The interdependence of an overextension in housing, employment, and the government will require change. That evolution will have unintended consequences.
Any change affects a broad, diverse economy disproportionately in sectors. With this correction, there will be no industry that is immune.