It’s difficult to overstate how different the world is now compared with Jan. 22, when Rich Wobbekind last took the stage at BizWest’s Economic Forecast to deliver his prognosis for Northern Colorado in 2020.
At the time, there wasn’t a whiff of a recession in the air. Now, entire swaths of the economy have been shut down for weeks, unemployment has rocketed past record highs set during some of the nation’s darkest economic times, and COVID-19 has taken the lives of more than 1,300 Coloradans.
Wobbekind, senior economist and associate dean at the University of Colorado Boulder Leeds School of Business, and Leeds Business Research Division executive director Brian Lewandowski joined Bank of Colorado president Shawn Osthoff and The Group Inc. president Brandon Wells to revise pre-COVID-19 predictions and provide an Economic Forecast 2.0 — an especially onerous task given that the full impacts of the coronavirus and the worldwide economic shutdown could take years to reveal themselves.
“These are pretty sickening numbers,” Lewandowski said of key economic indicators such as the unemployment rate.
The current economic collapse has been particularly jarring because so few people saw it coming. The fundamentals of the economy, which had been humming for a decade, remained strong as the virus first began its spread.
“Leading into this pandemic, banks had the best asset quality they’ve had in 30 years,” Osthoff said.
Wobbekind said the “national economy and state economy were on really strong footing and because of that we were going to have a very good year.”
The good news, Wobbekind said, is that after about 10 weeks of economic shutdown and unprecedented job losses, “we’ve potentially seen the worst of this.”
While the COVID-19 blow was devastating, it could have been worse if business and government leaders failed to make certain moves such as implementation of the Paycheck Protection Program, forecast participants said.
“Federal policies have helped mitigate the impact,” Wobbekind said.
Osthoff praised local banks’ response to the crisis and the subsequent disbursal of PPP funds.
Colorado’s community banks, which were responsible for disbursing more than 60% of first-round PPP funds, “really stepped up” and served as “first responders,” he said. The cash injection helped small businesses “survive and fight another day.”
The PPP process, however, left a bit to be desired, Osthoff said, noting the “clunky approval process” and lack of clarity on rules and guidelines as hurdles.
In addition to the CARES Act and PPP, the federal government has kept interest rates at historic lows.
This ultra-low interest rate environment is a boon for real estate purchasers, but it puts the squeeze on banks, forecast participants said.
“Low interest rates result in low net interest margins. That’s the primary driver of profitability for banks,” Osthoff said. “… As our net interest margins compress, our profitability compresses. We’re starting to see some of that. … These interest rates really put the hurt on profitability for banks.”
From March 25 through May 3 — the duration of Colorado’s stay-at-home order — listings across Northern Colorado decreased 31%, homes sold were down 24% and homes under contract were down 46%.
The stay-at-home order “had quite an impact” on residential real estate “because we weren’t allowed to do in-person showings,” Wells said.
Nationwide, homes sold dropped only 17% in April. Wells attributes this discrepancy to Colorado’s relatively early stay-at-home order.
Despite the slowdown, “we’re still seeing strong pent-up demand, and we still sold quite a few properties across the region even without in-person showings,” Well said.
In Northern Colorado, the total number of homes under contract from May 3 through May 25 is actually up compared with the same period in 2019.
“We’re actually outperforming 2019’s market as we’ve allowed showings and the pent-up demand has surged,” Wells said.
That demand, coupled with Colorado’s continued short supply of homes, could allow for the residential real estate industry to achieve a V-shaped recovery, he said.
Investors may flock to real estate during the economic downturn as a shelter from volatile assets such as stocks, Wells said.
“We believe that residential real estate will be a leader in terms of pulling the economy out of this pandemic,” Wells said.
During the Great Recession, commercial real estate rebounded quicker than other assets types, Osthoff said.
“We’re hoping we don’t see the drop [in commercial real estate prices] this time around,” he said. “And if we do see any kind of drop in valuationation, we’ll see a quick rebound.”
Other industries have been harder hit and will likely recover much more slowly than commercial or residential real estate.
About 65% of all initial unemployment claims since mid-March came from workers in just a handful of industries: hospitality, retail, health care, entertainment and other services.
Still, “no area [of the economy] has been left untouched,” said Lewandowski, who is predicting 125,000 lost Colorado jobs in 2020.
“How quickly can some of the laid-off or furloughed workers get back to work?” Wells asked rhetorically. “… Time will tell — I don’t think we’ve seen the end of this. There will be some continued impacts, but there’s also going to be some opportunities that come as a result.”
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