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  • The Plot Thickens

    By David Grana

    August 3, 2020

    I always find it annoying when screenwriters for films that are “based on true events” include very blatant and overly exaggerated plot elements that build up to the eventual calamity and leave the audience thinking, “no wonder it all went to hell!” Whether it’s a bureaucrat overlooking warnings of impending doom and opting to “go by the book” or a seasoned ship captain blatantly ignoring signs of an oncoming storm, it leaves me more wondering, “how could they not see this coming?”

    Captain Smith goes down with his ship in the 1997 James Cameron hit Titanic.

    I hate to say it, but I’m starting to feel that way after a spate of continual ominous news about the economy and its potential impact on real estate. However, rather than being blatantly exaggerated by a Hollywood writer, they’re slightly more subtle and seem to be piling up on a daily basis. This includes Chapter 11 bankruptcies, layoffs, earnings numbers, and postponements of major events. Today is starting to feel reminiscent of 2008, but in so many different ways.

    For starters, the coronavirus (yes, that plot line again) is rearing its ugly head not just across more US states, but around the world, with cases rising in Hong Kong and Australia’s state of Victoria declared a “state of disaster.” The former was applauded early on for its successful handling of the first two waves of the virus, and yet is now seeing its third (yes, its third) wave.

    Many European countries, which have also been praised for their response to the first wave, are now warning the resurgence of a new round of infections. Containment and eradication, it seems, is utterly futile. COVID-19 will be among us for some time to come, and adaptation appears to be the only path forward. How we do that without creating more devastation to the global economy is the trillion dollar question that we are all in search of an answer for.

    Back in March, St. Louis Fed President James Bullard had thrown around some rather frightening GDP and unemployment projections for Q2. Thankfully, he was off the mark with his forecasted 50% decline in GDP. Instead, it was a still-sobering 33% drop. Hopefully, he is on the money with his projected, historic Q3 bounceback. With congressional leaders still hammering out another stimulus package, that economic comeback hangs in the balance. Even a successful Q3 outcome leaves a big question mark hanging over the state of our economy in subsequent quarters.

    St. Louis Fed President James Bullard.

    For at least three years, investors were trying to determine when we would reach the end of the lengthy credit cycle. The long list of corporate bankruptcies, with many more in the waiting, seems to have answered that question. The big question is how many more are in the waiting? California Pizza Kitchen is just the latest last, and we’ve not yet factored in the personal bankruptcies (some strategic) that may start to rear their ugly heads, as families and individuals come to terms with the end of Federal Pandemic Unemployment Assistance. There are still many across the country who have yet to receive any form of aid, and they may be reaching a point of capitulation, whereby they will need to determine where their remaining funds are best spent. Here in Nevada, it’s estimated that anywhere between 60,000 and over 100,000 individuals who have filed for unemployment benefits are still waiting, while DETR has declared that an undetermined number of filers have been overpaid and that they are struggling to recover those funds.

    Making matters worse for our state, the annual Consumer Electronics Show (CES), which attracts over 100,000 visitors to Las Vegas every January, announced its shift to a digital format. This was a devastating blow for our convention space, as well as hotels and restaurants, who depend on the income generated from the large-scale event. Shortly after that announcement came the postponement of the upcoming Garth Brooks concert from August to February. The event was scheduled to inaugurate the nearly-complete $1.9 billion Allegiant Stadium.

    These two announcements may be a harbinger for further cancellations, as well as whether or not the Raiders will be playing their home games in an empty venue, for which $750 billion of the cost is dependent on resort room tax. One can’t help but wonder what this means for the vast number of smaller shows up and down the Las Vegas Strip, many of which are scheduled for a September re-opening. Year-on-year McCarran Airport visitation numbers for June were already down to less than one quarter of their 2019 figure. Mind you, The Strip only started opening up on June 4, but this monthly year-on-year figure will be a true measure for just how strong of a comeback Las Vegas is staging.

    Now for some good(ish) news. The housing market remains steady and strong in the Las Vegas Valley, with limited inventory and plenty of qualified buyers. This is against the backdrop of Nevada being on the lower end of the national scale for homeowners’ ability to keep up with their mortgage payments. The National Association of Realtors recently published the U.S. Census Bureau’s Household Pulse Survey, which indicated that 82.5% of the state’s households made their June mortgage payments. The demographic that struggled the most was the 25-39 age group, with only 66% able to pay their mortgages, followed by the 55-64 age group and 78.5%.

    Breaking it down even further, only 81% of households with income levels of $100K-$150K made their June mortgage payments. They were followed by households with income levels of $50K-$100K, with a rate of 85.4%. What this could mean is that households with higher incomes have been more successful at making deferment arrangements with their respective lenders than households in lower income brackets. It could also mean that these households may be sitting on massive piles of debt amassed during the past decade and a bit of cheap money.

    Though the residential market has been shielded from the plight of commercial real estate for the moment, growing economic uncertainty will catch up with it and could spell trouble as we get deeper into this recession. There may, however, be light at the end of the tunnel, according to Pam Junge of The Junge Group Brokered by eXp.

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    In a recent conversation, she pointed out that a number of investment funds, including Toronto-based Brookfield Asset Management, have raised hundreds of millions in cash to deploy on single-family residential properties, (if and) when they flood the market. A number of these players may be enough to prop up residential and prevent it from seeing the travails of the Global Financial Crisis.

     

    We’ll see what surprises this coming week brings. In the meantime, keep your eyes and ears open and stay safe!

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