It's been a challenging year for economists and anyone else trying to forecast the economic future. After the COVID-19 virus struck, the economy around the world came to a grinding halt. Parts of the economy have bounced back but the recovery has not been universal. A K-shaped economy that benefits the stock market and wealthy investors, even as many workers lose jobs, has been the story of the second half of the year.
The National Association of Business Economists releases a quarterly report based on a survey of its members. The December forecast reflects the experience of economists who are looking at the global rollout of vaccines at the same time that we are seeing ongoing failures of businesses as well as struggling restaurants and a future that could include hotel foreclosures.
When will a full recovery occur?
The economists expect more moderate growth in 2021. The forecast indicates a 4.1% annualized growth rate for the fourth quarter of 2020, with a gross domestic product (GDP) growth rate of 3.4% in the first quarter of 2021. The bulk of the economists (73%) surveyed believe the economy will be back to the pre-pandemic GDP by the second half of 2021.
The optimistic outlook of the economists surveyed depends a lot on what happens next. We are still in uncertain times. It's not a surprise that 78% of the respondents to the survey believe that the widespread delivery of a COVID-19 vaccine is the biggest upside potential for economic growth. The downside risks include the growing second wave of the pandemic. The number of cases in the United States has reached over 15 million. It's not a surprise that 57% of the respondents see this as the greatest risk to economic growth. Another core concern is the lack of a new stimulus package. A second stimulus is seen by many market watchers as essential to the overall health of the economy. However, 53% of those surveyed don't believe that a new stimulus package will be agreed upon by the end of 2020.
A strong future for residential real estate
The second half of 2020 will likely finish up to be one of the strongest that residential real estate has seen in recent years. The panelists surveyed believe that housing starts in 2021 could be as high as 1.41 million; that's over 9.3% over the 1.29 million starts in 2019. They also see an ongoing increase in existing home prices, forecasting that they could increase by 4% in 2021. This could put ongoing pressure on the residential real estate market as overall housing affordability continues to decrease.
The growing rental crisis
One thing that the economists didn't weigh in on is the growing potential for a wave of evictions. The most recent report from the National Multifamily Housing Council rent tracker showed that 75.4% of apartment households made a full or partial rent payment by December 6. This is 7.8% lower than one year ago and 5% lower than the previous month. This could be corrected by the end of the month, but it indicates the potential for serious weakness in the rental market. An analysis by Moody's Analytics estimates that as many as 10 million Americans could be behind on their rent payments. All of this puts a major strain on the economy as a whole and could impact both apartment real estate investment trusts (REITs) and individual landlords.
The question isn't if, it's how fast
Most everyone believes that the fundamentals of the economy before the pandemic were solid. While 2020 has been devastating in many ways, there is an expectation that recovery will be relatively quick. Government interventions will likely play a strong role in how fast that happens. One major concern is unemployment. The panelists expect unemployment to average 6.3% in 2021; that's far above the 3.7% average in 2019 but likely healthily below what we will see for the end of 2020.
For real estate investors, the forecast is equally nuanced. As the CDC eviction moratorium is set to expire at the end of the year, many landlords may need to begin the eviction process. REIT investors have already seen many of their investments rise on vaccine hopes, but retail and hospitality REITs likely face a long recovery.