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Economists Worried About The Current State Of Commercial Real Estate 

Economists are currently worried about the state of the $20 trillion commercial real estate industry. Ever since the beginning of the Covid-19 pandemic, office and retail property values have fallen due to lower occupancy rates, and the shift to working from home and rise in online retail. 

According to Goldman Sachs economists, about 80% of all bank loans for commercial properties are coming from regional banks; smaller banks have had more pressure to liquidate properties as time goes on and the properties don’t show a lot of interest. 

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“I do think you will see banks pull back on commercial real estate commitments more rapidly in a world [where] they’re more focused on liquidity, and I do think that is going to be something that will be important to watch over the coming months and quarters,”  wrote Goldman Sachs Research’s Richard Ramsden, reported by CNN.

Xander Snyder is a senior commercial real estate economist at First American who recently spoke to the media about the current state of the commercial real estate market and its potential threats to the economy. 

“Price growth is slowing and for some asset classes it’s starting to decline. Office properties have been more challenged than others for obvious reasons.”

“Now private lending to the industry is starting to slow as well — bank lending was beginning to dry up over a month before the Silicon Valley Bank failure even happened. Credit was getting scarce for all commercial real estate and a fresh bank failure on top of that only exacerbates that trend,” Snyder explained. 

“A lot of people hear commercial real estate and they think it’s all the same thing and the trends are they’re all the same but they’re not. The underlying fundamentals of multifamily and industrial assets remain relatively stable on a national level.”

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Snyder then explained exactly why commercial real estate ended up in the position it’s in today after the trends it saw within the past few years: 

“As credit becomes scarcer and more expensive, it’s hard to know exactly what buildings are worth. You get this gap opening up between sellers and buyers: Sellers want to get late 2021 prices and buyers are saying ‘we don’t know what things are worth so we’ll give you this lowball offer.’ That was already happening and the result of that price differential was bringing deal activity down.

It’s different for office and retail properties. There’s been a fundamental shift in how we use office space and that has changed demand. That’s something you should have your eye on, especially as low-interest office loans come due.

We’re running into a situation where office-owners have to refinance at a higher rate and only 50% of the building is being used. That doesn’t translate to good cash flow metrics for the lender,” he explained. 

According to The National Association for Business Economists’ (NABE) most recent survey, published this Monday, a majority of economists are predicting a recession to occur this year as inflation rates will likely remain above 4%.

“Panelists generally agree on the outlook for inflation and the consequences of rate hikes from the Federal Reserve. More than seven in ten panelists believe that growth in the consumer price index (CPI) will remain above 4% through the end of 2023, and more than two-thirds are not confident that the Fed will be able to bring inflation down to its 2% goal within the next two years without inducing a recession,” said NABE Policy Survey Chair Mervin Jebaraj.

For sale

The Housing Market Is In A Recession And What It Means For Those Looking To Buy A House

Over the last few months, the housing market was at an all time high between high demand, surging prices and low interest rates.

However, recent data revealed that the market may actually be in a “recession” from where it once was. 

“We’re witnessing a housing recession in terms of declining home sales and home building,” said Lawerence Yun, chief economist for the National Association of Realtors.

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The slowdown in market sales will hurt the economy but it could also help those people who are searching for a home who are willing to pay the high prices.

According to Barrons, ever since July, previous homes were sold at an annual rate of 4.81 billion which marked the lowest rate since November of 2015.  

New home sales also have found themselves in a decline into their their lowest level in six years. 

“It’s not a recession in home prices. Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price.”

Both home builders and home sellers are experiencing the slowdown which explains why the prices are still up even with the start of this “recession.”

The rise and fall of the housing market also goes along with supply and demand. Even though the demand for homes has dropped recently, the supply count is still very tight. 

The lack of supplies is partly due to the lack of construction that has occurred over the last decade and even since the 2008 crash.

The demand for buying new homes have continued to drop since January, but the mortgage rates have still continuously faced a rise from 3.3% at the beginning of the year to 6% now.

The high mortgage rates have made it harder for those looking to buy a home to afford them.

The demographics also play in part with the supply and demand of the housing market as well. 

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Even while there is a recession within the market, there are still more people searching for a home than there are actual homes to buy. 

“We are seeing more inventory come into the market, but it’s not enough to meet the buyer demand,” said Jessica Lautz, vice president of demographics and behavioral insights at NAR. 

Given the constant highs and lows of the market, buyers may want to be patient before they decide if they are ready to commit to buying a home. 

For first-time homebuyers, they also have to consider the price of rent because that is consistently increasing as well. 

“Even though borrowing costs have risen, it still in the long run may be worth buying a home given that what’s driving inflation right now is rising rental prices. It still may be an opportunity to get out of the pressure of rents,” said Jeffrey Roach, chief economist at LPL Financial, a national broker-dealer. 

Politicians Warn Of Recession If Debt Limit Is Hit In Coming Weeks

Numerous democratic politicians have taken to addressing their concerns that if the debt limit is hit in the coming weeks, it could spell a crippling recession for the U.S. economy.

Speaking with CNBC, Treasury Secretary Janet Yellen explained that she sees Oct. 18 as the deadline for the debt ceiling to be addressed by Congress. If the ceiling isn’t dealt with, the U.S. would default on their debt for the first time in history.

“I do regard Oct. 18 as a deadline. It would be catastrophic to not pay the government’s bills, for us to be in a position where we lacked the resources to pay the government’s bills.”

The debt limit had previously been suspended back in 2019 until July 31 of this year. On Aug. 1, the debt limit reset to $28.4 trillion.

Senate Majority Leader Chuck Schumer (D-NY.) has echoed Yellen’s sentiments, and announced on Twitter that he has filed cloture on legislation passed by the House in order to suspend the debt ceiling, and that the Senate will be voting on moving forward Wednesday.

Schumer had previously attempted to gain approval of a debt ceiling increase multiple times, but failed due to the filibuster blockade that the GOP put in place back in June, which requires 60 majority votes.

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Yahoo! Finance explains that as of now, the 100 votes are split evenly between the two parties. The Democrats have been able to reach just 51 votes thanks to Vice President Kamala Harris’ tie-breaking vote.

Schumer expressed his desire to “avoid irreparable economic harm to people and families.” Schumer also called for Republican senators to show they don’t have to “link arm in arm with those extreme members of their conference” by voting in favor of suspension.

The tense situation has been muddled with mudslinging between the two parties, with President Joe Biden accusing Republicans on Monday of playing “Russian roulette” when it comes to the debt ceiling, and that the GOP needs “to get out of the way” in order for the U.S. to avoid a financial crisis.

Biden also explained that the Trump administration is at fault for the need to raise the debt limit because of “the reckless tax and spending policies” that occurred during that time. “In four years, they incurred nearly eight trillion dollars,” Biden said.

In his press conference, Biden gave America an idea of what economic problems would arise if the government is forced to default on its debt.

“Defaulting on the debt would lead to a self-inflicting wound that takes our economy over a cliff and risk jobs and retirement savings, social security benefits, salaries for service members, and benefits for veterans.”

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Meanwhile, Senate Minority Leader Mitch McConnell (R-KY.) has shown no inclination for the GOP to help Democrats through their votes in order to raise the borrowing limit, while also accusing Democrats of “sleepwalking” towards a debt default.

Yahoo! Finance discussed a majority of ways this debt ceiling bout could end, one of which is the filibuster being lifted by McConnell if Schumer continues his strategies. Another involves Schumer moving to ban to the use of the filibuster in regards to the debt ceiling, although it is noted that maneuver would carry some risks with it due to the senate containing a number of filibuster advocates.

While the general belief is that a positive resolution, no matter what party it comes from, is more likely to occur as opposed to a debt default, the latter is still an intimidating possibility that could send the U.S. financial status spiraling.

PPP Loan

Why Some Businesses Are Hesitant To Apply For PPP Loan Forgiveness 

This week, the Small Business Administration opened up their forgiveness portal for the Paycheck Protection Program (PPP) loans. The CARES Act initially made these loans available for small businesses who were struggling to stay afloat during the pandemic. The Act went into effect in the beginning of April, and since has dealt out more than 5 million approved loans which equated to $525 billion. 

To qualify, small businesses had to show that at least 60% of the loan would be going towards payroll costs for employees. The repayment terms of these loans are also relatively casual in terms of federal loans, as most firms will only pay an interest rate of 1% and have at least a six-month grace period before needing to start payments. Loans that were given before June 5th must be repaid in two years while those dealt out after have five years. 

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Even with all of these seemingly attractive qualities, accountants nationwide are noting that many small businesses are choosing to sit out this round of PPP loans after the initial round of loans began going more towards large corporations and wealthier employers who didn’t really need the financial support as badly. 

Additionally, many small businesses are still asking Congress the same question in regards to these loans with no real answer: will expenses covered by these PPP loans be deductible on future tax returns? Ann Kummer is a Certified Public Accountant in New York who claims to be giving a lot of her clients the advice to wait before applying for a federal loan. 

“My advice to all of these clients is that you don’t want to be the first to rush into the forgiveness process. Things will probably continue to change, do you really want to be the guinea pig?”

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Many small businesses feel the same way, especially considering so much change has already occurred in terms of the pandemic and its impact on the economy. There’s still no word from Washington D.C. on what the next Covid-19 relief bill will look like either, something many Americans have yet again been waiting for. 

According to the IRS, forgiveness of the loan will be tax-free, but business owners who take out a PPP loan will not be able to write off expenses that in any other context would be deemed deductible if they use the PPP funds to cover that cost. However, many Congress members disagree with the IRS’ claims and want small businesses to be able to deduct those costs, making this one of the many points of contention that’s delaying the release of another relief bill. 

Overall, many business experts and accountants nation-wide are urging their clients to hold off and wait in terms of applying for one of these PPP forgiveness loans. While many businesses are suffering now, depending on how much this loan program changes the damage could become a lot worse for them down the line. 

Experts recommend that all businesses maintain a separate business account for all of their loan proceeds so they’re able to see exactly what they’re receiving and when they are spending it. Additionally all businesses should maintain any and all documents that show how their funding has been spent throughout the duration of the pandemic. This way, no matter how much the pandemic and the forgiveness program changes in the coming months, businesses will have a formal record of spending and receiving.

Unemployment Claim

Unemployment Rates Continue To Rise Amid Covid-19 Pandemic

According to the Bureau of Labor Statistics, in April alone, 20.5 million Americans lost their jobs, making this the most sudden and largest decline in employment since the government began tracking the data in 1939. Those losses also account for the 870,000 Americans who lost their jobs in March as well. For comparison, during the financial crisis in 2008 around 8.7 million Americans lost their jobs, total. 

The loss in employment is an obvious result of the coronavirus pandemic and multiple quarantine policies that have been enforced because of it. The unemployment rate went up by 14.7% in April, again, breaking the record for the highest level of unemployment the Bureau’s seen since it began recording monthly employment rates in 1948

Once businesses began closing and stay-at-home orders were being enforced in late March millions of Americans began losing their jobs. According to reports the leisure and hospitality industry has been hit the hardest so far with a loss of over 7.5 million jobs, and retail follows it with a loss of over 2 million jobs. 

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Historically speaking, the hardest part of a recession is rebuilding what gets lost. It took the United States the past ten years to create over 20 million new jobs for the American people after the 2008 recession, and now, all of that hard work was diminished in a matter of weeks. However, some big business owners are confident that this situation will be different, since the economic/job losses have been a result of a worldwide health pandemic. 

The larger issue is for industries that involve a more face-to-face consumer experience, such as restaurant workers, hotel employees, and local businesses. There’s going to be less of a demand for businesses like that because it’s going to be more difficult to convince customers to actually leave their homes when it’s not fully necessary. 

So what’s the government currently doing to help ensure our economy can recover from this pandemic and it’s huge economic impact? While it’s easy to make comparisons to our countries current situation and the Great Depression, we also have to understand the US lacked any sort of safety net in the 1930’s. 

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Once this pandemic began, local, state, and federal governments began acting to expand unemployment benefits and extend funding to small businesses. Stimulus checks have been dealt out to every American adult earning less than $99,000 a year, and while these programs have received quite a bit of backlash and have been viewed as not nearly enough action from the government, they have provided some relief to workers and employers across the country.

Congress has expanded unemployment benefits to include an additional $600 a week for the next four months and they also expanded who is eligible to file for unemployment benefits; contractors, self-employed individuals, and workers in the gig economy can now apply. 

In New York, Governor Andrew Cuomo claims that the state was able to hire 1,000 new employees specifically for sorting through unemployment claims. Government workers in New Jersey are also looking for experienced workers to help them work with decade-old computer programming for this process. So in a sort of sad ironic twist, the decline in the economy is simultaneously helping it rebuild itself, slowly. 

Overall, however, many Americans are disappointed in how long it’s taking all levels of government to respond to the many needs of the people right now. More than half of all Americans still haven’t received their stimulus checks, and even when they do they know it won’t be able to help much. Obviously, it’s going to take time for the US labor market to recover, but for now, the least we all can do is support one another, and continue to demand that the government does it’s job to protect its citizens.

JP Morgan Chase

JPMorgan’s CEO Jamie Dimon Is Expecting A ‘Bad Recession’ To Follow The Coronavirus Pandemic

In his annual shareholders letter, Dimon, who’s the chairman and CEO of biggest bank in the United States, claimed that while JPMorgan may have entered into this crisis in a position of power, COVID-19 has quickly taught us all just how unpredictablely this virus moves.

Hong Kong

Hong Kong Will Give $1,200 To Each Of Its Citizens

Hong Kong has been in the news quite a bit within the past six months. Between ongoing protests regarding discontent with the current political climate and the more recent coronavirus outbreak, the citizens of Hong Kong deserve to feel safe again. 

The protests and health emergency in Hong Kong has caused its economy to slump into a recession during the third quarter of 2019; the city is also expected to record its first budget deficit in 15 years due to the declining economy. Financial Secretary Paul Chan expects the situation to only get worse, however, the  government is implementing a program to give its citizens a bit of a financial cushion during these trying times. 

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Paul Chan addressing the Legislative Council, Feb. 26th 2020

The metropolitan and financial hub made an announcement on Wednesday (2/26) in which they stated that every Hong Kong resident over the age of eighteen will receive 10,000 yen (about $1,200) as a part of a 120 billion yen stimulus package that is meant to be distributed amongst the cities citizens. The program is estimated to benefit around seven million people. 

“Hong Kong’s economy is facing enormous challenges this year. The outlook is far from promising in the near term. Hong Kong’s economy has been dragged by a host of headwinds that percolated last year, including fallout from months of mass protests, the ongoing US-China trade war and the slowing global economy. Now, it is also confronting the spread of the novel coronavirus, which has dealt a severe blow to economic activities and sentiment in Hong Kong,” Chan said to Hong Kong’s Legislative Council.

Chan went on to explain that the money will be coming from a fund that was specifically established “in view of the deteriorating economic and employment conditions as a result of the coronavirus epidemic.” In addition to the financial compensation of 10,000 yen, Chan also stated that income tax would be greatly slashed for certain residents depending on their income bracket, however, they predict that it will benefit up to 2 million Hong Kong taxpayers, based on census data. 

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Additionally, housing authorities are giving low-income individuals who are living in public housing a month of free rent and the same perk will be given to 200,000 residents living in underprivileged households, which will also be determined by financial census data. The goal of all of this is to prevent the economy from getting any worse, and maintaining where it is now so that there’s more of a chance that it will bounce back. 

The budget deficit for 2020 is already way above what Hong Kong is used too, so it’s important that the government tries to protect its citizens, especially when they have a multitude of other issues to be concerned with, like their general health and safety. Luckily, Hong Kong has about $145 billion in fiscal reserves as a financial cushion to combat the deficit and benefit its citizens. In the long run, the city should be able to reverse the economic damage that has been inflicted. 

“[I] believe the economy will be able to bounce back in the long term. Although the impact of the epidemic on our economy in the near term could possibly be greater than that of the SARS outbreak in 2003 … Hong Kong’s economic fundamentals remain solid. The economy of Hong Kong should be able to recover once the epidemic is over,” Chan said.

Selling Home and keys

Supply of Homes for Sale Slumps in December

The final month of 2019 saw a greater slump in real estate sales than previously anticipated by the market. With the holiday season in tow, December is never a popular time to list a home for sale – however this past month’s supply of homes for sale was 12% lower when compared with the same month in 2018, according to realtor.com. This was also a much steeper decline than the 9.5% drop witnessed in November.

As expected, the shortage of homes for sale has taken the biggest hit at the low end of the market, but the drain in supply is actually accelerating across all markets, including the most expensive properties. The end of the year saw the supply of entry-level home priced at less than $200,000 drop more than 18% annually, compared to the 16.6% drop witnessed in November. Midrange houses priced between $200,000 and $750,000 dropped 10.2% annually, compared with November’s decline of 7.4%, while the top end houses priced over $1 million reported a drop of 4.4% annually compared with November’s 2% slump. The median listing price on a U.S. home is currently just under $300,000.

While low-cost homebuilders are continuing to tap into a market of millennials – around 4.8 million of whom will be turning 30-years old in 2020 and looking to buy for the first time – the supply of houses being built and listed simply isn’t able to meet the sizable demand.

The drop noted in December suggests continuing unevenness in the housing market, with many predictions expecting historically low levels of houses for sale to come. December’s slump represents a loss of approximately 155,000 listings, compared to the same period in the previous year, and the amount of new listings is decreasing as well.

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So what is causing this difficult time for the housing market? Higher prices are discouraging many potential movers from listing their homes; increasing numbers of older homeowners are choosing to stay where they are rather than selling their property; and a large number of investors have spent the past decade transforming previously sellable homes into rental properties, which has removed them from the market for prospective buyers.

Real estate is a local business however, meaning not all markets are encountering the same effects. While areas such as California, Seattle, San Francisco and San Jose all encountered a 30% drop in inventory in December, the major markets of San Antonio, Las Vegas and Minneapolis-St. Paul saw their supply of for-sale homes increase. This may appear to suggest that the struggling locations have simply faced an unfortunate year, but the problem is far more widespread than just a few bad districts.

Demand for houses will inevitably increase into the year. With mortgage rates still low potential buyers have greater purchasing power available, but this short supply is likely to push prices up across the board, and currently the majority of new homes in the U.S. are already on the mid to high end of the scale. While many builders are beginning to develop lower-cost properties, as well as ramping up production in general, it will likely be some time before their efforts begin to make a real impact across the market.

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So what next for the housing market? If you believe the gloomiest predictions, the U.S. could be due for another market crash. Just like in 2008, slow wage growth has made it difficult for potential buyers to keep up with the rising house prices. Property sales are currently expected to drop by 1.8% this year, and it’s likely that potential buyers pull out as they struggle to afford the few properties on sale. Combined with a greater uptake of low mortgage rates, this does not paint a pretty picture for real estate. As sales decline, prices may follow – this could leave buyers struggling to make payments on houses that were too expensive for them in the first place.

This is a worst-case scenario prediction however. New homes are being built across the country and the rate is increasing – construction began on 1.37 million new homes in November 2019, a 3.2% increase on October’s numbers and a 13.6% increase on the same month a year prior. If these numbers are accurate and production is successfully ramped up, the construction industry may be able to alleviate the strain that the housing market is currently facing.

Right now, the best advice may be for prospective buyers to hold on to their cash. Low mortgage rates may seem tempting, but the lack of houses available will mean paying out an unjustifiable fee overall. The situation may improve further into the year as more and more properties are built, but if possible it’s worth waiting to see if the market steadies out over the coming years before making such a sizable investment.

Economy Stock Market

Despite Booming Economy, Experts Worry

Unemployment rates are the lowest they’ve been in 50 years, wages are increasing, and the economy’s expansion is the longest-running on record. So it may come as a surprise that journalists are reporting that the overall mood at last weekend’s annual meeting of economic forecasters was one of concern and pessimism. Instead of praising President Trump’s economic policies for the impact on the economy as the Trump administration would surely prefer, experts at the conference warned that a few economic indicators signal that trouble may come for the economy soon. Though by traditional standards the economy has been healthy and strong for the duration of Trump’s presidency, government budget deficits and the weakness of central banks among other factors concern experts who fear that the when the current expansion ends, as it inevitably will, the negative consequences could be drastic and painful.

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This sentiment is mirrored by the “Global Economic Prospects” report released on Wednesday by economists at the World Bank, who described the global expansion as “fragile” and built upon a shaky foundation. Though this report predicts a continuation of economic growth throughout 2020, it also warns of a potential economic downturn posed by the ever-present risk of trade wars between the Trump administration and other countries as well as changing markets in countries like China and India. While trade-related tensions between the United States and China appear to be lessening for the time being, it’s hard to know whether Trump will sign a trade deal with the foreign country as expected given how unpredictable his behavior has become, particularly in the aftermath of impeachment and a potential war with Iran.

In European nations, technology companies that are largely based in the United States face new taxes, which Trump has responded to by threatening tariffs on French imports, posing a threat to the global economy. And according to research published by the American Economic Association, the economic fight between China and the United States has resulted in lower wages for workers in both countries. While the economy is predicted to continue to grow, the rate of growth is forecasted to slow to 1.8 percent this year and 1.7 percent next year, according to the World Bank. And the combination of the tax cuts passed in 2017 and increased spending have ballooned the national deficit to almost $1 trillion a year, a figure that worries economists around the world. 

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Interest rates in advanced economies have been dropping as a result of trends like the aging of the population, meaning central banks have less power than they would otherwise to grow the economy in the event of a recession. These low rates are expected to continue for the foreseeable future, causing economists grief. Economists like Valerie A. Ramey of the University of California have called on Congress to pass bills increasing spending on infrastructure and research and development in order to stimulate the economy. Though Trump campaigned on plans to improve the nation’s infrastructure, such plans have not materialized, meaning the potential economic gains caused by infrastructure spending have not been realized. Overall, economists say that policymakers will have to act strongly in order to combat the effects of an upcoming recession, the immediacy of which grows more likely by the day.

Recession

The Political Impact of Recession Fears

Though the economy is still by all accounts quite strong, Democratic presidential hopefuls are already incorporating talks of a recession into their political strategy for 2020.