This year has been deeply marked by the global coronavirus pandemic, which took a large part of the world by surprise, and left indelible scars on families, communities and economies. The United States economy felt the full brunt of the pandemic, as government-mandated quarantine orders closed business activity, kept people at home, and pushed output into a steep slump. Activity rebounded in the second half of the year, with residential real estate markets experiencing a surge in transactions. As detailed by my colleague, Danielle Hale, housing benefitted from a strong demographic wave, low interest rates and a move to affordability. Our 2021 Housing Forecast expects markets to move toward more normal seasonal patterns in 2021, even as the shortage of inventory will place affordability front-and-center.
The beginning of 2020 was characterized by an upbeat confidence in the outlook for the global and U.S. economies. By most forecasts, U.S. gross domestic product (GDP) was expected to grow, employment and wages remained on an upward trajectory, and real estate markets—while mindful that we were in the longest expansionary cycle—were expecting another year of solid growth.
The outlook and economic reality turned dramatically in March 2020, as the novel coronavirus, which had originated in China and had spread through Asia and Europe, reached U.S. shores. The viral spread was declared a global pandemic by the World Health Organization, and in light of its fast spread, high contagion rate and danger, prompted U.S. policy makers to adopt stringent measures to protect the health of Americans. The country instituted various degrees of stay-at-home orders, travel was significantly curtailed, and a large share of workers moved their work stations from their employers’ offices into their homes.
The viral pandemic impacted the U.S. quickly as it spread from coastal, internationally-connected metropolitan areas, toward the rest of the country. The 30 days following the mid-March quarantine orders saw a spike in cases and deaths. The late spring and early summer brought an improvement in new deaths while new infections steadied, but the much-needed re-opening of business activity across the states led to a second wave of rising cases that began mid-June and crested in mid-July. Following the summer peak, new cases declined again through mid-September before beginning another rise which is ongoing. The health concern continues to be a major factor in social, economic, employment and personal decisions, injecting a significant dose of uncertainty into the landscape.
Economy: Gross Domestic Product
The impact of the nationwide lockdown was swift. Even though it went into effect during the last two weeks in March, it led to a 5.0 percent annualized drop in real GDP during the first quarter of the year. With business activity significantly curtailed during April, May and half of June, the decline was followed in the second quarter by the largest annualized real GDP drop on record, a 31.4 percent plunge. Recognizing the severity of the economic decline, the National Bureau of Economic Research announced an economic recession determination by early June, much earlier than it had in prior downturns.
Most GDP components dropped by double-digits in the second quarter, as quarantined consumers stopped spending money except for necessities. Furthermore business investments also dropped, as capital and equipment expenses took a back seat to cash preservation. Service businesses were particularly hard-hit, as airlines, car rental agencies, hotels, resorts, restaurants, convention centers, theaters and event venues found themselves with nary any customers. With a pandemic that spread largely by human contact, a majority of companies that previously relied on face-to-face interactions found themselves seeking contactless solutions. E-commerce platforms and technology companies built around an online-centric process became almost-instant beneficiaries of the new reality.
As the quarantine restrictions were lifted during the summer, business activity slowly emerged from the lockdown. Consumers and businesses returned toward a much-anticipated sense of normalcy, even as the “new normal” was still a distance from the pre-pandemic environment. The rebound in activity was mirrored in the strong jump in the third quarter GDP, which advanced at an annual rate of 33.1 percent. Buoyed by months of savings, wages and unemployment benefits, consumers spent more on cars, recreational vehicles, home improvement materials, outdoors recreation, and even at restaurants. Meanwhile, seeing the rebound in consumer demand, businesses upped their investment spending, although at a more moderate pace. However, even with the unprecedented rebound, economic output remained below its pre-pandemic level by 3.5 percent—roughly a full year’s worth of normal growth—suggesting that the road to full recovery may take longer than anticipated.
During the three quarter period, international trade mirrored the pandemic reality. As lockdowns were enacted, exports of goods and services dropped during the first and second quarter. With a resumption of activity and traffic, exports rebounded in the third quarter, with a 59.7 percent gain. At the same time, imports—which provide a negative contribution to GDP—also dropped during the first and second quarter at double-digit annual rates, even as American consumers were looking for an array of goods, from bicycles and outdoors equipment, to masks and vitamins. The crimping of supply pipelines led to shortages of goods across a range of industries. The third quarter saw imports jump at an annual rate of 91.1 percent, as the supply chain moved to satisfy the demand for goods.
Government spending—the other major GDP contributor—illustrated the massive fiscal efforts that legislators and the administration put into staving off widespread layoffs and greater economic pain. Government spending rose 1.3 percent and 2.5 percent in the first and second quarter, respectively, driven by large expenses at the federal level. Nondefense federal spending during the second quarter jumped 37.6 percent, a significant shift in the annual rate of growth. By the third quarter, as the political parties wrangled unsuccessfully over another fiscal stimulus package, and enhanced unemployment benefits expired, federal spending dropped 6.2 percent, primarily due to an 18.1 percent decline in nondefense expenses. At the state and local government levels, government spending mirrored a shift in tax revenues, which declined from lack of consumer spending. State and local governments increased spending in the first quarter, but cut back in the second and third quarters, as budget shortfalls became clearly apparent.
Economy: Monetary Policy
The arrival of the pandemic and the economic recession it brought was quickly recognized by the Federal Reserve. The U.S. central bank was one of the first major institutions to signal the severity of the situation, when it announced in early March an unscheduled 50 basis point cut in its funds target rate. The initial move was followed in short succession by a return to the zero lower bound for the overnight rate, revived Great Recession programs, such as the Term Asset-Backed Securities Loan Facility (TALF), as well as a massive infusion of capital through various loan and credit facilities—Commercial Paper Funding Facility, Primary Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility, Primary Market Corporate Credit Facility, Secondary Market Corporate Credit Facility, Municipal Liquidity Facility etc.
In tandem with fiscal spending, the Federal Reserve also moved to support small businesses through its Paycheck Protection Program Liquidity Facility and the Main Street Lending Program. In addition the central bank focused on providing a floor for real estate market financing through outright purchases of mortgage-backed securities (MBS). In an effort to maintain stability in the banking system, the bank also took measured steps on the regulatory front to ease capital requirements and encourage banks to actively lend money to both businesses and consumers.
As we move toward the end of 2020 and with the economic recovery progressing at a moderate pace, and far from guaranteed, the Federal Reserve remains in an accommodative posture, meaning a zero federal funds rate and low longer-term rates throughout the forecast period. The range of additional credit facilities keeps credit flowing to businesses and households. The bank has indicated clearly that it remains steadfast in its quantitative easing policy to ensure a full recovery in employment. The Federal Reserve Chairman also stated that the bank is willing to let inflation move above its preferred target of 2.0 percent, in order to stabilize the economy. Through these approaches, as well as its strong commitment to MBS purchases, the Fed will continue to play a dominant role in capital markets and give mortgage rates a favorable environment. However, as credit flows normalize, we expect the Fed to begin tapering the size of its MBS purchases in 2021.
Economy: Employment Trends
The employment landscape moved in tandem with the seesawing of business activity in 2020. Following a decade of expansion which saw the creation of 22.2 million jobs across all sectors of the economy, the pandemic-induced quarantine caused a dramatic drop in employment. As Americans sheltered at-home, in just one month (April), the net number of employees losing their jobs totaled 20.8 million, virtually wiping out an entire decade-worth of gains. The losses were a mirror of the impact face-to-face business sectors faced, with the largest concentration of vanished positions in leisure and hospitality, education and healthcare, retail trade, as well as professional and business services. The combination of these major sectors was responsible for 14.7 million job losses. Manufacturing, construction, transportation, wholesale trade and local governments also saw sharp drops in payrolls.
The ensuing months witnessed a rebound in employment, but the pace and level of advances remained moderate. Over the May through September period, companies added a net 11.4 million new positions to payrolls. The bulk of the gains came in the leisure and hospitality sector, which added 4.5 million new jobs, many previously furloughed employees. In a positive development, retail trade—which also experienced a sudden and sharp retrenchment in April—added 1.9 million jobs to payrolls. Education and healthcare, along with professional and business services added a combined 2.3 million jobs over the time period. The construction and manufacturing sectors regained about 40-50 percent of their April losses.
With the sudden changes in employment, the unemployment rate saw similar dramatic changes. With the wave of layoffs hitting in April, the headline rate (U-3) jumped from 4.4 percent in March 2020 to 14.7 percent in April. When factoring part-time and under-employed workers, the broader measure of unemployment (U-6) reached 22.8 percent. As employment improved over the May to October months, the headline unemployment rate gradually dropped to 13.3 percent in May, 11.1 percent in June, and reached 6.9 percent in October.
Policy makers recognized that these massive losses in employment would impact people across the country. In response, the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress and signed by the president in March, contained several provisions aimed at ensuring that workers who lost their employment would receive unemployment benefits, including the Pandemic Emergency Unemployment Compensation (PEUC) and the Pandemic Unemployment Assistance (PUA). The PEUC benefit offered unemployment insurance up to an additional 13 weeks of regular/traditional benefits, and included an additional $600 per week, in addition to the regular unemployment check, even for those who have exhausted their eligibility. The main benefit of PUA was that it included workers who were not normally eligible for unemployment benefits. The extra PEUC money went a long way to support many unemployed Americans through the difficult period. However, the enhanced benefit expired in July. It was temporarily boosted by the Lost Wage Assistance initiative, signed by the president in an executive memo, and offering an additional $300 per week to complement the typical unemployment check. Yet, even this benefit eventually expired, leaving many unemployed workers dependent on smaller checks. Moreover, the PEUC program payments are scheduled to expire on December 26, 2020, casting a large shadow of uncertainty and possible financial hardship over the millions of Americans still drawing unemployment benefits in early December.
These actions were mirrored in the unemployment insurance claims numbers. The number of initial claims rocketed from 282,000 during the week ending March 14 to 3.3 million in the week ending March 21. That initial jump was eclipsed by the number of Americans filing unemployment claims in the following two weeks, which reached 6.9 million and 6.6 million, respectively. The number of weekly claims improved gradually during May through June, dropping to about 1.5 million. However, they remained stubbornly elevated over the ensuing months, well into October. Initial claims dropped below 800,000 in the second half of October, but compared with historical averages, remained worryingly high. Just as importantly, the number of workers on unemployment rolls across all programs exceeded 22.7 million toward the end of October. In addition, as many unemployed Americans were running out of eligibility, the number of permanent job losses approached 4.0 million.
Economy: Remote Work
The pandemic and subsequent quarantine forced a large share of companies and workers to shift their employment arrangements from an office setting to homes almost overnight. The speed of the transition was followed by an understated success story for 2020. Enabled by over two decades of technological progress, the promises made at the dawn of the internet age in the mid-1990s were fulfilled this year, as the ability to work from nearly anywhere became a fact of daily life. The pandemic pushed close to four-in-ten Americans into at-home work environments. In the process, companies found that employees spent the time saved on commuting working more, and the increased productivity translated into higher profits.
Remote work and its success in keeping companies viable was a major contributor to business continuity, and avoided even larger scale layoffs. In addition, with the increased demands for technology and altered work streams, Americans reconsidered the suitability of their existing homes. In the process, many people decided to relocate, seeking more space, larger homes with home offices, quieter neighborhoods, and affordability. The shift saw a noticeable migration away from high-density expensive downtowns toward lower-cost, greener suburbs, as well as small and medium-sized towns. Emboldened by many companies extending their remote work policies into 2021 or making them permanent, many home buyers and renters looked for larger spaces, even if it meant trading a longer commute from large employment centers.
Economy: Consumer Confidence
Consumer confidence felt the push and pull of the strong economic currents through the year. The Conference Board’s Consumer Confidence Index dropped from a value of 118.8 in March to 85.7 in April. It stayed lower until September, when improving economic conditions lifted the index above 100.0. Confidence was flat in October, but dropped to 96.1 in November, as the pace of recovery remained modest and the outlook for additional unemployment funds stalled in Congressional negotiations.
Economy: Capital Markets
Capital markets moved under the overarching influence of monetary policy in 2020. With the Federal Reserve resorting to zero interest rates and significant quantitative easing in response to the recession, many investors were split between those who favored safety, and moved into bonds, and those who favored returns, who found a volatile answer in equity markets. Low rates provided no relief for retirees and many Americans dependent on fixed incomes, who saw their savings offer negative returns, after factoring inflation.
However, low rates were a positive and welcome development for real estate markets. With many investors looking to the safety of mortgage bonds and compounded by the Federal Reserve’s noticeable purchases of MBS, interest rates for home loans broke new record lows 13 times over the March through November period, with the Freddie Mac 30-year fixed rate dropping from 3.65 percent on March 19 to 2.72 percent on November 25. Favorable mortgage rates proved to be a boon for first-time and repeat buyers, as well as homeowners looking to refinance and lower their monthly payments. Fueled by historically low rates, the housing market rebounded much faster than the broader economy, with sales of new and existing homes seeing strong advances during the summer and fall months.
Economy: 2021 Outlook
The economy remains on a moderate growth path for the remainder of 2021. Fourth quarter GDP is expected to show continued gains, albeit at a slower pace. Even with the rebound, 2020 real GDP is expected to close the year 3.6 percent below the 2019 level. As employment gains and monetary policies support consumers as the continuing backbone of economic output, 2021 will see an improvement in activity, with real GDP projected to grow at a 4.1 percent annual rate.
Based on continued consumer demand, companies are considering adding employees to payrolls, especially during the critical retail holiday season. The unemployment rate is expected to average 8.7 percent for 2020, and drop to an average of 7.3 percent in 2021. With improving employment, consumer confidence is projected to improve.
Meanwhile, with the Federal Reserve committed to monetary easing for another two years, inflation expectations remain low. With the housing market on a solid foundation, and bond investors looking for the safety and returns offered by MBS, mortgage rates are likely to remain favorable. Rates for home loans are projected to average 3.08 percent in 2020, and inch up to 3.44 percent by the end of 2021, keeping financing costs accessible.