The U.S. has committed over $6 trillion to the coronavirus pandemic. The stock market is climbing after it plummeted below 19,000 in March. Curves have been flattened across the country and employees in every corner of the nation are slowly returning to work.
So far that record-breaking amount of money has not done much good from a macro standpoint. Because one vital sector of American life has been left out of that relief completely: housing.
Without housing relief, consumer spending is sure to be impacted for the next year or more. This relief would be paramount because consumer spending makes up most of the United States’ GDP, nearly 70%. At this point, we must brace ourselves for another deep recession.
Rock Meets Hard Place
According to NPR, approximately 48.5 million American rent and more than 60% of American homeowners are actively paying on a mortgage. Even more pressing is that housing costs are almost always the single largest expense in every American’s budget.
Millions of Americans are currently out of work; either laid off, furloughed, or hours cut due to the pandemic. Payroll earnings are near zero for millions; confirmed by the record 40+ million Americans filing for unemployment benefits in the past two months.
However, their rent and mortgages are still expected to be paid or repaid within a predetermined amount of time. As of this writing, there has been no legislation passed to provide relief for renters or homeowners.
Adding insult to injury, the economy itself has ground to a halt. Consumer spending is at an all time low, oil demand decreased so low futures were trading in the negative in April, and U.S. retail sales had its single largest monthly drop on record.
You may be asking yourself, “If the economic outlook is so bleak, why is the stock market doing so well?” It is true, the stock market has rallied with impressive gains since it bottomed out in March.
However, it is important to note that the stock market is not the economy. The economy exists on Main Street, not Wall Street.
Wall Street Detour
The stock market is a barometer for rich people’s feelings, not the economy. The proof is easy to see as the stock market has climbed 32% while simultaneously more than 40 million Americans attempt to claim unemployment benefits.
It is encouraging that the market has bounced back but it is important to know exactly what this likely is: a dead cat bounce. This a common financial concept where a stock or commodity declines sharply in value then temporarily recovers in value before declining even further. Temporary is the operative word.
The Dow Jones Industrial Average fell around 18,500 points on March 23rd, down from a record high of 29,500 points in February. Since then, the stocks have climbed up to 25,000+ points.
But why? The economy is still mostly shuttered, with states just beginning to open up with restrictions. Millions of Americans are stuck at home with many not earning income or spending money right now. There are no economic indicators that allude to a more prosperous future in the short-term.
The concept of a dead cat bounce represents a psychological delay in sentiment; a delay in recognizing the reality of the situation. The stock market, and the rich people who control it, will eventually catch up.
Businesses are going to shut down en masse; corporate shareholders will lose confidence and they will eventually realize the market cannot support such overvalued stock prices. I expect to see the Dow slump from its current levels down to the 14,000–16,000 point range in the next 6 to 12 months.
Another contributing factor in this prediction is the Presidential Election in November. Markets hate uncertainty. And there is nothing more uncertain than a potential changing of the guard in the White House.
Rent to Lose Out
Even more detrimental to our immediate future is the U.S. economy’s reliance on consumer spending. Americans are going to spend the next 12 months or more trying to pay off their past due housing bills and will have little discretionary income to contribute to their local economies.
The United States is a nation of consumers. We run a massive trade deficit with the rest of the world as our citizens demand to be satiated by retail stores, restaurants, and service providers.
More importantly, entire industries are predicated on the expectation that a large section of the U.S. consumer base will have discretionary income to spend on their favorite products and services.
However, as of right now, there are no plans for forgiveness or relief when it comes to rent or mortgage payments for Americans. If the stay-at-home orders remain in place for three months and individuals cannot work during that time, renters will run up an intimidating balance that is about to come due very soon.
Lets say, for example, stay-at-home orders end in June and there are three months of rent or mortgage payments that need to be made up by millions of Americans. At the same time, that was three months of them earning little or no income.
The average rent in Los Angeles, according to RentCafe, is $2,500 per month. If residents are unable to pay and choose to defer their rent for three months, they are left with a balance due of $7,500. Spread out over 12 months, that is $625 per month.
The mayor of Los Angeles, Eric Garcetti, put a moratorium on evictions that allows tenants to defer rent penalty-free while the state of emergency is active. Those tenants will have up to 12 months after the moratorium is lifted to repay their balance due.
Tenants are still required to pay their future rent charges; in this example, $2,500 each month. However, due to the coronavirus deferment, they must now pay an additional $625 per month for the next 12 months in order to avoid any legal recourse from their landlord or bank.
Vanishing Consumer Spending
Most Americans cannot even afford a $400 emergency bill; and now we are expecting them to strip hundreds of dollars per month out of their budget for the next year, earmarked for back due rent and mortgage payments.
70% of the United States’ GDP is consumer spending; this represents you and I going out and buying a meal, jeans, or a car. Because of the way the government has handled the coronavirus pandemic, our consumer spending will be significantly reduced for quite awhile.
The $625 per month from the earlier example is no longer spent or saved for a rainy day. This is $156 per week for one household and this lockdown has impacted millions of American households. This is a massive, systemic issue that is going to ripple through the entire economy.
In cities and rural areas where the cost of living is lower, you are still looking at $100-$300 per month per household being removed from their local economy. How many mom and pop businesses will close down because thousands in their smaller communities no longer have discretionary income available?
Larger companies can weather a down year, but country-wide we will witness a purging of retail businesses, local shops, small start-ups, and restaurants that are just barely surviving month-to-month in a normal economy.
Even worse, every business that shuts down also ends the employment for dozens of Americans. Knowing that a strong economy starts from the middle out with a population that has money to spend, we can expect this downturn to stretch on for quite awhile.
On a more individualistic basis, Americans in general will become more expense conscious. After The Great Depression was over and America was again prospering, a whole generation never broke the habits they formed during those lean times.
We all remember the grandparents who would use old bread bags as freezer bags or who would picked up a penny off the sidewalk. Hard to forget behaviors of a long forgotten time in American history.
I do not expect the lingering behaviors of frugality and minimizing waste to be as extreme as the Great Depression generation. However, Americans will become more conscious of their usage, waste, and overall spending habits.
Bonus: Commercial Exodus Coming…
A lack of housing relief is not the only thing that is going to hurt the economy. Companies abandoning the idea of office buildings will also upend how local economies are structured.
Not every American got furloughed or laid off during the pandemic. Millions of white collar employees continue to work from home. Once corporations realize they can maintain relatively high productivity with a majority of their employees working remotely, there will be little need to maintain cost-heavy office space.
Commercial real estate will go through its own exodus as companies realize how much overhead can be cut by moving large portions of their workforce to remote status. Companies spend millions of dollars each year leasing, owning, maintaining, and/or paying massive utility bills for their employees to have a place to work.
Now they realize they can just have them work from home with little interruption to their day-to-day output. The amount of capital they could free up by moving a large portion of the workforce to remote status is staggering. I suspect several companies are already planning this transition.
None of these changes bode well for an economy that is based almost entirely on consuming products and services at a ferocious level. For the next year, millions of renters and homeowners will find themselves in a situation where having a roof over their heads means cutting back on some of the small luxuries they greatly enjoyed before the pandemic.
It will come down to a very simple question each citizen will ask themselves: “Is this a need or a want?” This one question will guide millions of Americans over the next few years.
They may want to buy lunch while on break at work. But they need somewhere to live. So when the time comes to pick between paying the rent/mortgage or buying a burger from the corner diner, we know how people will choose. In the end, there will be a “Now Leasing” sign hanging in the window where the diner used to be.