All Forum Posts by: Jarrod Covey

K Shaped Recovery?

The National Bureau of Economic Research classifies a recession as “a period of declining economic performance across an entire economy that lasts for several months.”

The residuals of lost jobs, unemployment, and consumer behavior caused by COVID-19 and subsequent “lockdowns” are still being felt across the U.S. — with numbers in April 2020 reflecting largest declines.

During this month we saw both job loss claims and unemployment rates — 13.5% and 14.5% respectively — the highest since the 1929 Great Depression. (2)

For recent contrast, the peak of the 2007 Great Recession saw job loss and unemployment rates at 6.5% and close to 10% — that’s a difference of 7% and nearly 4% and with a population of nearly 330 million those are big numbers.

We are also seeing signs of a recovery taking shape and forming into what economists call a “K-Shaped Recovery”.

This article aims to clarify the type of Recovery we find ourselves in, identify who has been most affected, how these changes reflect in the Austin Real Estate market, and review what key economic indicators to watch in Austin and Texas.

Why Does It Form a "K"?

The prongs that develop to shape what eventually resembles the upper and lower portion of the “K” are formed when different parts of the economy experience different rhythms to their recovery at differing rates, times, and magnitudes.

Elise Gould, senior economist at the EPI, was quoted stating, “the two prongs can also represent: people with high and low wage levels, those that have the ability to work from home and those who don’t, and those who have liquid wealth assets to survive the recession and those who don’t”. (6)

A simple way of conceptualizing this shape taking form is imaging upper portion of the curve developing with the employed population, and lower portion with those unemployed.

What Industries Were Hurt in Texas?

According to the Federal Reserve Bank in Dallas using year-to-date (YTD) data, as of October the Oil and Gas industry saw the largest percent dip of job loss at -32%, while accounting for 1.3% of the Texas workforce.(1)

Leisure and hospitality industry saw the next greatest dip in YTD job loss at -22%. As of October, this industry accounts for 9.4% of total state employment, or 1.2 million people. (2 & 7)

Two other notable industries that saw greater than national job los are Construction and Other Services. Together they account for 10% of Texas workforce, and YTD they see a -6.8% and -12.8% job loss rate respectively. (1)

Are People Still Spending?

With the inability to spend money at service industry related businesses — restaurants, leisure & hospitality, tourism, etc. — consumers are spending more on Goods (laptop, workout equipment, appliances, etc.) in addition to saving their money for the unknown.

Online retail sales is a notable reference outlining the uptick in “Goods” spending with a +2.7% YOY increase in spending.(2)

People are also spending more money fixing up their houses, which is putting strain on supply of materials pushing the price of lumber and other building material up.

Austin’s Real Estate & Economic Landscape Doing Okay?

“Real estate values have not decreased since late 80’s in Austin and residential values will continue to improve, while commercial should plateau coming out of crisis with challenging inventory to address. Rates should hold for a couple of years.” (2)

Between 2010 and 2019 the median home price in Austin has gone up 67% with number of annual home sales up 89%. The demand has continued through 2020 with the City of Austin seeing double digit percent increases in year-over-year (YOY) median prices of homes throughout COVID-19.

Austins market continues to outperform the rest of the nation on important indicators like workforce, which is 44% greater than it was in 2007.

With 17,400 jobs added in October, Austin narrows the pandemic related job losses to 28,300 and puts itself on pace for a 1.9% decline in YOY job loss.

Even the industry with the largest dip in employment — leisure & hospitality — added jobs in five of the last six months leaving our seasonally adjusted unemployment rate of 5.3%. And, we are still on pace for the record breaking re-employment if we add the earlier speculated 78,000 jobs by years end.(2)

What about the other key indicators?

Other key economic indicators are in play when assessing viability of a market, and these are highlighted in a collaborative annual report done by PricewaterhouseCoopers & Urban Land Institute titled .

These two leading real estate research sources use criteria — such as population, size & growth, development opportunities, investment capital inflow, and transaction volume to define viability of U.S. Markets. (3)

In this one hundred and seven page report, Austin landed in the number one spot for Overall Real Estate Prospects and number six in Homebuilding Prospects.

Texas Economic Outlook

Texas has been a powerhouse for the U.S. economy producing 9% of it’s GDP, 10% of manufactured goods, is the #1 producer of oil & natural gas, and Texas accounts for 20% of U.S. exports.

Texas saw steady growth for 137 months until COVID-19 caused a decline in the economy.

With weekly unemployment claims peaking at over 300,000 and a total 3.8 million jobless claims between March 15 to Nov 14, Texas was in unchartered territory.(2)

The two most recent economic downturns in Texas — Hurricane Harvey 2017 and 2008 Great Recession — peaked at a fifth of that number with 60,000 claims.

There are positive, rebound type numbers indicating a comeback — like Jobless claims declining to 6.9 percent in October, with a forecasted unemployment decline to 5.6 percent for 2020. (2)

The most important indicator economist reference when identifying a true recovery is manufacturing output, which is just beginning to recover after steep declines in second quarter. (1)

So Are We in a Recession?

This has been one of the fastest comebacks when referencing percent drop/gain related to these key economic indicators.

For a local reference of this, Austin MSA Hospitality & Leisure industry employed 1.33 million people in February. Come April, that same industry employed 728,000 people dropping 60% month-to-month.(4)

The following month you saw a positive 13.8% month-to-month gain in employment, or 866,600 now employed Hospitality & Leisure employees. (4)

But, despite these signs of a comeback we will finish 2020 with a higher than healthy unemployment rate, and a partially opened and struggling service industry.

Predictions on when we will back to normal hinge on the vaccine availability and how quickly people get vaccinated.

Final Thoughts

After reviewing this information it’s easy to see how much the Hospitality & Leisure industry needs help, and supporting them through gift cards or donations will help prop them up until we can officially re-open everything.

Speculations on how long until full recovery are modest for Texas — two to three quarters — while the rest of the U.S. could be seeing at least three years of down economic times. (2)

References

1. Dallas Fed; “Your Texas Economy” — https://www.dallasfed.org/-/media/Documents/research/econdata/texaseconomy.pdf
2. Mark Sprague, State Director of Information Capital presentation — available on request
3. PWC & ULI: “Emerging Trends in Real Estate” — https://ulidigitalmarketing.blob.core.windows.net/emergingtrendspdfs/ET2020FallMeeting.pdf
4. Dallas Fed: Leisure & Hospitality — https://www.dallasfed.org/research/econdata/ausleiha.aspx
5. Dallas Fed: Texas Employment — https://www.bls.gov/eag/eag.tx.htm
6. Elise Gould: Quote — https://www.fastcompany.com/90549147/forget-u-or-v-or-w-we-may-be-headed-toward-a-k-shaped-recovery

Hi @Eric Inigo - with the right boots on the ground any market can be turned into a turnkey. 

Identifying one market to invest in to start then building a team around that city. 

With the appreciation Austin is seeing, there is an opportunity to execute the BRRRR strategy and refinance into a favorable LTV.

It is worth noting that during the rent phase cash flowing is difficult here.

Thats great @Jacoby Lewis - you're going to look back at the decision and be happy...and better financially set up

Hi @Miles Klos - happy to share my experiences in wholesale and flipping here in Austin. Just pm'd you

@Austin Powell - the appraiser will reference renovated comps in their valuation of the property with a 'subject-to' appraisal. It's an extra expense most investors forego and any contingency makes your offer a little less attractive in a sea of other offers, but it is a good way to mitigate risk for your first project. 

@Arian Cabrera Alvarez - love the hustle, let me know if you need help running comps on a property

@Austin Powell - break every step of the BRRRR method down one by one and it becomes a lot less stressful.

Buy a house that doesn't require a large renovation - cabinets, countertops, vanities, flooring, paint, popcorn, and hardware at most - rent to a well vetted, reliable tenant, confidentially refinance by getting a 'subject to' appraisal contingency on purchase to better secure targeted LTV.

Set a good tone on the first one, rinse, and repeat.

It takes a lot of time and energy to secure each step which is where missteps can happen. 

Hi @Oscar Song - I've personally seen an uptick in interest from California buyers whether they are moving here or not. Houston, Dallas, San Antonio and Austin make up four of the top ten metros in the nation with regards to GDP, job growth, and unemployment. 

Hi @Howie Chen - GC's typically want to make 20% on total job cost. If you spend some time talking with them, there may be an opportunity to get them down to 15%.

Underwriting a lot/teardown in Central Austin that as of 2008 has Corridor Mixed Use zoning allowing for 95% impervious, a three story build, and 40 feet in height.

Reading further into the Ordinance - the development bonus for building Affordable Housing, which needs to equate to 25% of the development, is an additional 20 feet in height for a total build of 60 feet in height.

This opportunity puts a much higher ceiling on the exit number with condos in the area selling at a median of $352/sq ft. 

Has or is anyone in Austin undertaking similar development projects?