The Crash of 2021
by Christopher Levarek
“Life is a cycle, always in motion, if good times have moved on, so will times of trouble.”
- Indian Proverb
At present, the uncertainty of the markets is in clear view. The volatility of the stock markets, closing of multiple businesses and unemployment numbers related to Covid-19 restrictions have put fear in many across the United States.
According to Fortune magazine, “The Federal Reserve Bank of Atlanta projects that GDP dropped a record –35.2% in the second quarter….The unemployment rate shot up from a 50-year low of 3.5% in February to a staggering 14.7% in April, but has since fallen two consecutive months coming in at 11.1% in June.”
Now what we need to understand is that Covid-19 might have lit the match that started this brush fire of change but throughout history, change is inevitable especially with regards to the economy and real estate. The economy has ridden a massive bull market for the last 10-12 years and a correction or “recession” was inevitable. In fact, I wrote about it back in March 2019, when the yield curve inverted which typically predicts an upcoming correction.
Today I wanted to share two reasons why the real estate crash or recession is around the corner. These were recently discussed in Ken McElroy’s video “The 2021 Housing Crash” and offer some concrete indications of the same.
Reason # 1 Income Instability
There is a strong indicator of increasing income instability based on current/future unemployment numbers and the ending of the government assistance programs.
According to the Economic Policy Institute, 20 some million people are unemployed or expecting to be unemployed over the next few years. This is simply based on present numbers of 11% of workforce not returning to jobs or 4.9 million, 6.6 million workers already out of the labor force and over 21 million jobless claims since March 2020. These numbers are used for this estimation of 20 million people.
Additionally, the government assistance programs known as the PPP (Payment Protection Plan), EIDL (Economic Injury Disaster Loan) and Unemployment insurance programs are set to terminate near September 2020. This will leave many who have depended on this source of income for their livelihood or rental/mortgage payments at a loss.
When you couple both these factors, we have income instability for a large number of the population.
Reason # 2 Housing Inventory
At present, housing inventory is low and prices remain high due to a variety of factors to include low interest rates, high demand and government assistance or relief payments. Some cities and states have even lost many listings, decreasing inventory, due to the Covid-19 restrictions and demand to move to sub-markets instead of large city areas.
With over 4.5 million on forbearance programs and 20 million people facing eviction by end of September 2020, when those government relief payments end, many will be forced to foreclose on their home as they are unable to pay back the “forbearance” given for their loan payments or pay rents without unemployment assistance.
This will create a wave of foreclosures and evictions as well leaving many without housing. It will additionally cause those properties to be reclaimed by the banks and lead to an influx of REO homes, bank-owned homes, short sales, etc. Home-owners will also increase the inventory by listing their home to recoup any equity possible as prices fall. As inventory increases, house prices will continue to drop and a “crash” will be felt.
In Final
If the government is able to continue boosting the economy with printed capital or stimulus checks, this recession or crash could be stalled or delayed. With increased dependency on government bailout or stimulus, the hole gets deeper and the economic impact will be greater however it could delay the present prediction.
We recommend preparing for the upcoming crash and positioning correctly to be able to be in a power of strength. It is worth noting, there will always be opportunity whether in a recession or a peak so do not wait for the perfect moment, go out and find it. Invest Smart!