Coronavirus Tracker Update 5/30

Coronavirus Tracker Update 5/30/20

Previous editions: May 23, May 16, May 9, May 2, April 25, April 18, April 11, April 5

Hurricane season starts Monday.

CBO GDP FORECAST: 2020 WILL BE DOWN 5.6% FROM 2019. I hope you have not taken some of the positive economic news I have shared as an indication that things aren't that bad. They are. The Congressional Budget Office (CBO) issued Interim Economic Projections for 2020 and 2021. The CBO expects GDP to drop in Q2 11% (38% annualized) and to increase 5.0% in Q3 (21.5% annualized). GDP is expected to continue to improve, with 2020Q4 down only 2.5% over 2019Q4. That results in -5.6% decline annually. This is a larger decline in one year than the US experienced over two years in 2009-2010. Location Strategy had expected a lower drop on the assumption that lockdowns would end after 4 weeks of stablized cases, instead of going for at least 78 days, which the current extended period. Despite the severe decline this year 2021 should be an amazing year with GDP forecasted to grow by 4.2%. US GDP has not grown at this level since 1999. The recovery will be slower than the decline because of the likely maintenance of ongoing coronavirus interventions such as social distancing. Other factors of note:

Real residential investment is expected to decline by 13.8% (new construction and remodeling) in 2020
Real residential investment is expected to grow by 16.7% in 2021 and will represent about 1% growth over 2019 levels.
Unemployment may rise temporarily in Q3 as PPP expires, but the economy should still recover about 30 of job losses by the start of Q4.
Unemployment should fall from 16% in 2020Q3 to 8.6% in 2021Q4.

CBO cites the following elements of uncertainty in the forecast:

The course of the pandemic and unknown epidemiological elements of the disease
The response of individuals and policymakers to the pandemic. CBO describes the measures as "evolving."
The degree of "non pharmaceutical interventions" used to combat the spread of the virus
The quality of data - agencies have used new approaches to capture rapid changes that are untested in their comparisons to older approaches. Survey responses have fallen dramatically to BLS surveys and have led to misclassification of data. Additionally many of their projection and estimation tools rely on assumptions that may have been broken by the dramatic change in the economy.

ARE WAGES CRASHING OR GOING UP?: On May 11 the BLS released a report that showed average hourly earnings up 4% over March and 8% over April of last year. How is this possible when we lost over 20 million jobs in the same period? The reason why is because disproportionately it was lower wage workers who were laid off which skewed the average. So it went up because of math, not economic recovery. A review by the BEA on the Effect of Selected Federal Pandemic Response Programs on Personal Income shows employee compensation down by -8% from March to April while total personal income was up 11% due to a 90% increase in government social benefits - the pandemic response:

(all data from the Bureau of Economic Analysis. Reflects change from 3/20 - 4/20).

SO WHAT DID PEOPLE DO WITH IT? The last bar on the chart above shows a 200% increase in personal savings. This is the result of lower consumer spending and government stimulus funds. What did people do with it? According to data analysis firm Yodlee, one of the most common uses of the funds across nearly all income categories was the stock market. Even lower income brackets participated: people earning between $35K-$75K increased stock trading by 90% over the week before receiving their check. This may explain at least part of the divergence between the stock market and the economy. I think this is confirmed by TD Ameritrade, E*Trade and Charles Schwab all reporting record new retail brokerage accounts in the first quarter. I haven't decided if that's a good thing or not, but I suppose that may mean that they didn't need the money and found a decent place to put it. Or it could mean "'The rush of retail investors into U.S. equities is at least partly a function of a world with no casinos, no sports betting to speak of (horses and ping-pong aside), and little to do outside the home' ... Retail traders, especially those using the stock trading app Robinhood, have shown unusual buying patterns, pursuing cheap and particularly volatile stocks..."

COVID-19 IS BATTERING INDEPENDENT PHYSICIAN PRACTICES. More than half of all physicians work in practices with fewer than 10 doctors, and after 11 weeks of the pandemic, the average practice reports a 55% decrease in revenue and a 60% decrease in patient volume.

NOT DRAWING ANY CONCLUSIONS YET: There are many weaknesses of the MLS data in drawing broad conclusions on the market. Specifically in MLS you are measuring both changes in sales and the changes in share of co-op sales. Nevertheless, it's worth paying attention to this trend. Sales are down only about 10% compared through May 20th; if you compare all of May 2019 vs May 2020 YTD, 2020 is down about 18%. This suggests that May will be better than April YOY, since theoretically you won't be seeing more sales added to May 2019. I'll update this at the end of the month - we still have a lot of sales to catch up on.
TERMINATIONS MAY ALSO BE DECLINING. Because of the way MLS data is compiled, I can't show a YOY change in cancellation rates. Terminations were up 56% in April. But with sales down and terminations up, that should have driven a huge jump in can rates in April. With sales appearing to return to trend, terminations now are only about 10% above the same period last year.
PANDEMIC SHOWS UP IN PRICING. I haven't figured out the best way to capture incentives and discounting with the MLS data. But I figured that we're far enough along to see the effect in pricing. (third chart) Median new home sales pricing is lower than January 2015 - this was the broader trend anyway. Today's average new home in Houston is 500 SF smaller than it was in 2015. But it has also fallen nearly to January 2019 levels and size reductions were fully built in by that time. The last chart below shows average sales price per square foot for new home sales in the MLS. I don't think it's any coincidence that April 2020 was the highest sales price/SF in the last five years, and also represented the largest YOY sales decline. In May we've brought that down to $114/SF and also have seen sales recover. Given the economic news undoubtedly pricing is an area where we will struggle the balance of the year as we juggle volume and margin.

All charts and data from Houston Realty Information Service.

HERE'S WHERE YOU MIGHT FIND THE SECOND WAVE - I ran a story on this several weeks ago about a team from MIT gauging the extent of infections by the amount of viral load at WWTPs. (You know who you are if you read it). Now a team from Yale has discovered that viral loads in wastewater correlated to the COVID-19 epidemiological curve with a 7-day lag AND hospitalizations for COVID-19 with a 3 day lag with an R-squared of 0.99. In all candor, I read everything I put in here but you'll have to forgive me for drawing the line at this one. You can read it here. Someone please tell me if I'm wrong. A graph of their findings is below. I am building a tool to detect a second wave that does not involve hip waders that I'll discuss next issue.

FOR THOSE OF YOU TIRED OF PANDEMIC NEWS. Morgan Stanley has a report out on the influence of Gen Y/Gen Z on the economy and workforce. It predates the Pandemic, but I think the conclusions are pretty evergreen. The first Gen Z workers hit the labor market in 2022. Gen Z may have a similar impact on the economy as the Boomers did in the 1960-1980s. The report says:
"Work by the firm’s economic team, along with an in-depth survey of Generation Y and Z consumers, uncovered a significantly brighter outlook for the U.S. in the coming decades than previously thought. As Gens Y and Z combine in the workforce, these two outsized generations could power higher consumption, wages and housing demand, all pillars of GDP growth. "
“The CBO projections understate potential labor-force growth by 0.2 to 0.3% per year in the 15 years through 2040. We concluded that the CBO forecasts could be underestimating the level of potential GDP in 2040 by as much as 2.4% to 4.3%.”
And apparently there is no need to worry about the Millennial-oriented product you designed: "It also found no generational divide between Millennials and Gen Z, with both groups sharing broadly similar views on education and values. 'We interpret this positively as it implies that, alongside the continuous support to population growth, there will be no fundamental generational gap as Millennials relinquish their dominance to Gen Z.'"

THIS IS THE SMARTEST THING WE COULD DO AND SHOULD HAVE STARTED IN MARCH. Baylor College of Medicine starting a random antibody test program. All we know now from testing is how many people have tested positive (or negative). We haven't and probably can't test everyone to know how widespread the virus is. Random testing lets us see the spread of the virus geographically and demographically and enables the use of smart strategies over blunt ones like shutdowns. This is very good news for Houston that this program is starting.

"HERE'S MY PROJECTION MODEL. THEY WERE ALL WRONG. THEY WERE ALL WRONG." - AN ASTONISHING ADMISSION AND ACT OF LEADERSHIP BY GOVERNOR CUOMO. I have focused on the models because they drove so much strategy and we needed to understand them to develop an outlook for the economy. I also wanted to show you what was inside these things to provide some technical backup to what many of you probably already intuited about them. I commend Gov. Cuomo for his candor and humility in acknowledging the limits of what we know, and I hope his comments put a stake in the heart of modeling's more sordid practices. So unless George Romero has posthumously earned a PhD in epidemiology, I don't plan on discussing the models again.

CDC DROPS CASE FATALITY RATES BY AN ORDER OF MAGNITUDE. The case fatality rate (CFR) is the proportion of deaths from a certain disease compared to the total number of people diagnosed with the disease for a certain period of time. On Friday, May 24, the CDC released its revised COVID-19 Pandemic Planning Scenarios. The report contains a table of "planning scenarios" which includes current best estimates - and therein the CDC reports a revised CFR of 0.4% for COVID-19. This almost an order of magnitude below the WHO CFR of 3.4% that was widely used to justify shutdowns. This revised CFR is above that of a seasonal flu (0.1%) but below the 1957 (0.67%) and 1968 (0.5%). Location Strategy feature the work of Dr. John Iaonnidis - one of the world's most cited scienctists -- who on March 17 used the Diamond Princess statistics - one of two locations where 100% of the population has been tested - to determine the COVID-19 CFR was between 0.125% and 0.65%. The CDC also says 35% are asymptomatic.

If these numbers are accurate, this suggests that 42 million Americans (13%) have been infected with the coronavirus (fatalities divided by CFR divided by % symptomatic, the CDC figure is a symptomatic CFR). To me this sounds high, but random sample antibody tests have shown ranges from 2.8% to 25%.

SELECTED STATES FATALITIES PER CAPITA. I can't show all the states at the same scale because they'd all be overwhelmed by New York. But here's how several states with different strategies have performed on deaths per 10 million people. Source: data compiled from covidtracking.com.

ONE MORE: 42% Of U.S. Deaths Are From 0.6% Of The Population.

DASHBOARD UPDATE. The Southeast Texas Regional Advisory Council (SETRAC) dashboard is below. ICU COVID patients peaked on April 12. 48 days ago. General population COVID patients peaked April 8. 50 days ago. I've tried to look at how individual openings have affected cases. That's very difficult to assess because we've increased testing throughout the entire period, making it difficult to assess increased cases from viral spread vs. artifact of increased testing. So for now, I'm sticking with hospitalization data.

Some viewpoints worth reading:

Are you looking at new deals? Want to understand what's going on in the market today? We're here to help, even if it's just a short conversation.

Stay well.

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Sincerely,

Scott Davis

Location Strategy, LLC

832.304.3478