Coronavirus Tracker Update 4/11/20

Just a quick round up of news and data this week. MUCH ADO ABOUT NOTHING. I had intended to include an economic analysis of the Governor's plan to reopen the Texas economy. Apparently the plan is to create a committee that will release a plan in 10 days. Obviously it is impossible to model the impact of a committee; but the fact that this is the best our leadership has to offer after more than a month of shutdowns, particularly given the low extent of coronavirus here, has shifted my recovery outlook from optimistic to decidedly negative. The case for optimism is still economically viable, although it decreases daily. The deterioration of the political situation into delay, responsibility-shifting and ex post facto justification of these policies, however, has increased the case for a more negative outcome. Friday's announcement should have included an actual plan, not an excuse for 10 more days of delay. This comes at a great cost even to the very institutions the strategy is designed to protect: UTMB in Galveston is facing a $40 million shortfall, and I've heard a Med Center institution is losing $50 million per month. The restaurant industry was also unimpressed, and they are the second largest employer of people behind the government. TESTING-BASED PLANS WILL STRUGGLE. One of the components of the President's recommendations for re-opening was also mentioned by the Governor: testing. Harris County is presently testing about 1,000 people per day. I think the testing centers in Ft Bend and Montgomery can do another 200 each. With almost 7 million people in the region, that's not enough. These plans also don't address the fact that nationally, we're running out of testing supplies - how can testing be increased if we can barely maintain our current levels? A more sober reading of those forecasts a month ago might have led us to invoke the Stafford Act to produce swabs and reagents instead of ventilators that no one will likely use. HOUSTON CASES ARE LOW. Finally there is some sort of dashboard. The graphic below is from the Texas Medical Center and shows as of 4/16/20, there were 308 coronavirus ICU patients, with 519 available ICU beds - and a surge capacity of an additional 1,200 beds. It also includes a forecast based on levels of social distancing but includes no reference explaining how these figures are calculated. The second chart is from Harris County's dashboard and it suggests that cases have probably already peaked. The IHME forecast was revised yet again - last week it said Texas needed 1900 beds, now needs 1300 - which is actually slightly below our actual hospitalizations. This is the primary forecast tool the government relies upon. In six weeks, Houston/Harris County has about 3,300 active cases and 67 deaths. For reference, that's roughly the same number of suicides in the county in the first six weeks of the year.

HUGE INVENTORY BUILD IN EXISTING MARKET. HAR is showing a huge inventory build in the existing market with MOS jumping to 9.4 in April. The month's data is incomplete, so I don't believe we'll end up there. Through the first 15 days of the month existing sales were down only about 20% - so I suspect that we'll see a somewhat smaller number at the end of the month - there are more than 5,000 pending transactions in the MLS right now. But after seeing inventories fall, we are going to see them rise. A lot.

NEW SALES DOWN LESS THAN EXPECTED. HAR MLS shows new construction home sales for April 1 - April 15 down 20% YOY. Certainly that does not include every transaction and you may experience sharper declines than that. The chart below shows the breakdown by price; $200K-$400K down about 25%, under $200K down about 5%, $500K-$800K were actually up. This was unexpected, but likely is because buyers at this price point have been financially secure enough to proceed with closings. I think this will change, declines here would have made a negligible difference in the overall total. The second chart shows pending transactions by price range. Cancellation rates are elevated and 67% of them are at price points with the highest cancellation rates.

JOB LOSSES ACCELERATE. The Texas Workforce Commission reports that 76,000 Houston area residents filed for unemployment this week; that makes a total of 192,000 which is about 9.3% unemployment - double the rate in February. However, the WSJ reports states are only approving about 65% of applications. If true, this suggests the number is closer to 300,000 - which would give Houston an unemployment rate of 12.3%. While this is terrible for the economy it's not unexpected - and it is survivable if it is of very short-term duration. But it is an example of why the uncertainty created by a 10-day delay in reopening plans is so costly.

CANCELLATIONS SKYROCKET. HAR shows cancellations on new home sales contracts more than doubled in the first two weeks of April YOY. This is coming off what looks to have been a strong March; I've seen reported elsewhere community sales were down, but about 2/3 of communities we surveyed in Houston showed sales increases from February into March.

Something to consider about oil. There is not really any good news about oil right now, and even some of the refineries are considering closing because of declining gasoline demand. But a big part of the reason for the decline is reduction in vehicle miles traveled. Chart below shows it down almost 50%. China experienced about the same reduction in traffic and is back to 80-90% now, with some areas surpassing last year's figures. Eventually in the next 30-60 days people will start driving again and begin to push this number back up - prices are being driven down at least part because of a dramatic and temporary (and unsustainable) condition. The chart below is from the Dallas Fed Energy survey -- and it looks like it will be a while before drilling activity resumes, the current break even numbers for non-conventional plays are lower than I would have thought. This suggests the extreme downward pressure on these companies will start to let up once demand returns.

Some viewpoints worth reading: Four Reasons It's Safe to Open America (from an MD) Epidemiologist says no direct evidence lockdowns work Refineries in Jeopardy from Collapsing Gasoline Demand Here are even more times when epidemiological models failed. The ventilator crisis that wasn't.

Again, still doing webinars. The webinar covers the national and local economic situation and Location Strategy's current forecast for Houston, and I find I've been running about two weeks ahead of most media reports and government actions. Stay well.

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Sincerely, Scott Davis Location Strategy, LLC 832.304.3478