What if it’s an O-shaped recovery? Hint: That would be really bad

By Phil Hall

May 27, 2020

 

As the nation seeks to move beyond the chaos of the coronavirus pandemic, predictions of what an economic resurrection will resemble has created something of an alphabet-based guessing game.

For some experts, the future holds a V-shaped recovery with a sharp ascension rising from the swift plummet into near-wreckage. For others, a U-shaped recovery is in the cards, with the economy stuck in the flat doldrums before any upswing takes place.

Then there is the potential of a W-shaped recovery, with a number of ups and downs prior to regaining stability. And perhaps most fatalistically is an O-shaped recovery, where a new wave of coronavirus infections disrupts the return to normalcy and brings the country back to where it started.

Among the thought leaders within the housing and mortgage industries, opinions vary on what the letter of the recovery will resemble.

For Joel Kan, associate vice president at the Mortgage Bankers Association, the recovery would fall “between the V to a check shape like that little Nike swoosh. Either way, we are expecting some kind of steep rebound – it’s just a matter of how steep.”

Kan pegged the shape of the recovery on state-level recoveries and how various sectors ratchet up their operations. And while unemployment levels have hemorrhaged since the pandemic took root, Kan noted the majority of Americans are still employed.

“You have a lot of salaried workers who are working remotely, but in other ways it’s a case of life goes on,” he continued. “Right now, they still have their paychecks and they’re working from home – and while you can’t say it’s normal anymore — one way to put it is that it’s somewhat uninterrupted.”

For Rocke Andrews, president of the National Association of Mortgage Brokers, the recovery will be somewhat longer and bumpier.

“I would probably go along with the W or a sawtooth version,” said Andrews, broker/owner of Lending Arizona in Tucson. “I think we’re going to have it in bits and spurts – we’ll have a little bit of an uptick as things get going again and people are going to get excited start some spending. But then, when October comes around, there’s probably going to be a slight revival of the virus and people are going to start getting scared again. Whether people get locked down or not depends on when the vaccine comes out.”

Ron Haynie, senior vice president for mortgage finance policy at the Independent Community Bankers of America, pegged the recovery on regions rather than the nation as a whole.

“It’s all going to depend on what part of the country you’re in and how long things are shut down,” he said. “I think it’s more likely maybe not to be a V, but maybe a small W.”

Haynie added the national economy was “really strong and firing on all cylinders” before the pandemic-induced shutdowns, with many people having pent-up demand to resume that pace. But he didn’t predict a speedy return to the pre-pandemic experience.

“Folks will be cautious as things open up, but I don’t think they’re going to stay away,” he said. “People, I think, want to get out, and as long as people aren’t afraid to go out, I think they will. I think the recovery will move quickly, but I don’t think it will be lightning fast.”

A more pessimistic view of the near-future comes from Anthony Sanders, professor of real estate finance in the School of Business at George Mason University in Fairfax, Virginia.

“I believe it’s going to be something more like an L-shaped recovery,” Sanders said. “It will be very slow recovery, and the reason why is that we’ve done so much damage to the economy by so many people being laid off that companies are not going to immediately hire those people. A lot of companies are realizing that they had a lot of workers that were not essential. And so now, once the market opens back up, they’re going to say, ‘Why do we need these nonessential workers?’”

Lucjan Orlowski, professor of economics at Sacred Heart University in Fairfield, Connecticut, shared Sanders’ concerns.

“It will be a very flat U-shaped recovery,” he said. “The economy’s not going to recover rapidly. There will be a permanent damage done by this pandemic crisis to the labor markets which will be impossible to rebuild or to regain. I expect permanent job losses in several sectors – hospitality, travel, traditional retail and many other sectors – but there will be slow job gains in food delivery, online shopping, online communication businesses and, most importantly, in health care and crisis management.”

Anthony Casa, chairman of the Association of Independent Mortgage Experts, was uncertain if there was an appropriate letter to define the recovery.

“I don’t know what letter represents six to 12 months of the trickling of jobs back into the economy and the return of spending habits,” he said. “It is going to be very slow.”

However, focusing just on housing, Casa forecast a V-shaped recovery.

“There will be a very sharp and positive upswing,” he said. “It will be fairly exclusive to housing – this will be an outlier.”

Lawrence Yun, chief economist with the National Association of Realtors, seconded Casa’s prediction.

“For home sales, I see a V-shape,” said Yun. “There was a sharp reduction when the economy soured. But as the economy reopens, there will be a sharp return to almost normalization of home sales.”

Yun pointed out that during the pandemic period, “there was no evidence of any dent to home prices” and theorized housing could be the engine to drive the economy forward.

“Housing led economic recovery after recessions in almost every period going back to 1950,” he said. “And home builders need to be actively involved. Home construction work and the buying of lumber will help boost the economy.”

Gary Acosta, CEO of the National Association of Hispanic Real Estate Professionals, observed that historically low interest rates coupled with proactive outreach by the mortgage industry will keep the housing market vibrant in the weeks to come.

“The market has been more resilient than we’ve expected, even though people have not been able to view homes and purchase them in a way that they’ve done in the past,” he said. “The demand and the enthusiasm for homeownership and for the acquisition of real estate is still very, very high.”

Susanne Livingston, immediate past chairwoman of the California Mortgage Bankers Association, stressed that the new wave of refinancing sweeping across the mortgage market will help solidify the fiscal health of many Americans in the difficult period ahead.

“Borrowers are taking advantage of improving their cash flow and consolidating debt,” said Livingstone, who is also the owner of RWM Home Loans in San Diego. “Independent mortgage bankers are aiding borrowers in making sure that they can get through this this difficult time. And with refinances projected to be larger than 2019, that’s a good sign for everyone.”