As you look at what’s going on, and look forward to an eventual rebound, what shape comes to mind now?
We want a V; we’ll take a U if we have to; a long, flat, hull-of-an-ocean-liner trough, however, we simply can’t fathom.
Real estate’s glass-half-full types see a sector whose structural workings–scant supply of standing inventory, strong credit qualification criteria, household demographic demand, and, critically, a big pause of loan forbearance–remain in tact.
Their calculus–where the inputs and assumptions draw on all visible, historic, typical measures of force–models relatively benign impacts, especially on home values and pricing power, even in the most bearish scenarios of a two- to three-quarter broader economic recession.
This is important.
If house prices–because there are relatively so few of them available, and because supposedly people will want to exit dense urban areas in droves, and because loan qualification standards have been higher, and because the U.S. Treasury and its federal agencies backstopping nearly 80% of mortgages have extended forbearance on payments due–remain steady, or fall just a tad, then lots are worth what builders, developers, and land bankers have paid for them.
In other words, if house values stay where they are, or fall two to three percentage points due to a two- or three-quarter “bearish” scenario, builders won’t have to impair their lot pipeline, borrowers won’t go underwater on their loans, distressed real estate won’t become a factor in supply, and the sector will have successfully escaped the most severe pain of the Covid-19 pandemic and its economic maelstrom.
No arguing the logic here. The Fed, the Treasury, and all three branches of the U.S. government are all-in, working on multiple layers of business, society, and public health, to stem the free-fall, back-stop as many borrowers as possible, and put as much as a third of the economy into a self-induced coma while keeping it on a ventilator.
Still.
It’s queasily like deja vu all over again. Still too fresh in our minds are assertions that “sub-prime” represented a small percentage of total mortgages, a highly-manageable piece of the housing finance pie that it would be no problem to contain.
Still too fresh in our viscera are claims that a “soft landing,” solid fundamentals, strong corporate earnings, diversified investment strategies, and strength in many of the other raw metric benchmarks would shield the economy and its part from the blows of a subprime collapse.
And, still too fresh in our memories are hindsight acknowledgments and protestations along the lines of “none of us could have predicted … ” and “our models broke.”
Twelve years went too quickly for us to have forgotten what got said, what happened, and the price we all paid for remaining, as many of us did, in a cloud of denial.
Here, just a thought, we might try to draw an analogy–for purposes of trying to really assess what steps to take to best preserve, protect, and ensure your business’ viability and ability to navigate to future prosperity–from the scientific and medical community’s fight against Covid-19.
There’s the real-time, 24/7 battle, both to care for the sick and to try to contain the spread. There’s efforts to identify therapies–especially for the one-in-five Covid-19 patients whose case “goes sour.” Data on medical therapies is still lacking, still conflicting, still inconclusive. Doctors and scientists in hospitals and facilities everywhere in the world are still essentially mystified as to how and when drugs can work to arrest the grave effects of the virus on some people.
What’s more–on the containment front, as Calculated Risk’s Bill McBride notes:
Test-and-trace is a key criteria in starting to reopen the country. My current guess is test-and-trace will require around 300,000 tests per day at first since the US is far behind the curve. Some scientists believe we need around 800,000 tests per day.
So, we need more data on the drug therapy front to take care of the sick, and we need more data on the testing front to reopen economic activity, and we need more data on the science front to develop a vacine.
Does it not make sense, then, to assume that we need more data–new models, a brand new set of assumptions–to really understand the impact of the economic epidemic and its ultimate impact?
We think models that map relatively benign impacts on home buyer demand, builders’ land inventory, 2020 and 2021 backlogs–the structural support under already-deployed and penciled capital–may prove to be right. Or they may prove insufficient at understanding the sheer forces, the seismic turbulence, the duration, and the intensity of the shocks to the system.
We don’t know yet.
JP Morgan Chase ceo Jamie Dimon has his view, as expressed in his annual letter to shareholders:
“We don’t know exactly what the future will hold — but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” Dimon said in his annual shareholders letter. “Our bank cannot be immune to the effects of this kind of stress.”
What we do know is that the moment for leaders–of small, medium-sized, and big businesses in the real estate, construction, development, investment, manufacturing, and distribution community–is a “both/and” moment. Even as cash preservation is the primary gestalt, what comes next, down the back-part of the novel coronavirus infection rate curve, is no less crucial. Clark Ellis, principal and co-founder at Continuum Advisory Group, speaks of a need for “ambidextrous leadership,” a management system that prioritizes focus on dealing with the now, and planning for tomorrow, equally and simultaneously.
Check out this piece from the Harvard Business Review: “Both/And” Leadership. Always topical, it’s now especially timely.
“We propose a new model—one in which the goal of leadership is to maintain a dynamic equilibrium in the organization. Executives with this goal do not focus on being consistent; instead they purposefully and confidently embrace the paradoxes they confront. Senior teams build dynamic equilibrium by separating the imperatives that are in conflict with one another in order to recognize and respect each one (creating a separate unit to develop a new business model, for example), while at the same time actively managing connections between them in order to leverage interdependencies and benefit from their synergies.”
We don’t believe real estate and its home building and development will remain immune to the deep felt collateral damage to our economy over the past six weeks. We do believe, ultimately, we’ll emerge from the pain a better business. With a new model that can recognize, absorb, and thrive under stress in ways our current models fail to do.
