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Commercial real estate could ‘continue to worsen’ at the beginning of 2021: economist

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Calvin Schnure, Nareit’s Senior Economist, joins Yahoo Finance’s Seana Smith to discuss the real estate market, housing outlook, as well as break down his thoughts on the market and the impact the stimulus deal could have on it.

Video Transcript

SEANA SMITH: We want to turn to the economic front here. A new data point out on housing this morning. Pending home sales falling for the third month in a row. So for more on this, we want to bring in Calvin Schnure. He's Nareit's senior economist. And Calvin, great to have you back on the program. So we have record low borrowing costs. Yet this momentum it seems like in housing continues to slow a little bit. Why is this the case?

CALVIN SCHNURE: You know, the housing market is still really strong. I wouldn't focus on the decline. Pending home sales are down 2.6% from the prior month. They're up 16% from what there were a year ago. It's really important to keep in mind, this is for November. Housing activity typically slows quite a bit in November. Now they adjust for these seasonal variations. But it's kind of hard to adjust very accurately. I'm really focusing on the fact that pending home sales are still up 16% from a year ago. We're seeing prices rise 7%, 8% over a year ago, record low interest rates. This is a very strong market.

SEANA SMITH: And when you put it in I guess painting a better picture when you compare it to a year ago, maybe that's a better way to go about it. Calvin, what about the commercial real estate industry though? Because that's another area, or one area I should say, that has been hit hard. Simon Property Group, that's off just around 40%. Boston Property is off just over 30%. When do you expect to see, or begin to see a recovery here within the commercial real estate sector?

CALVIN SCHNURE: I do expect to see commercial real estate recovering in 2021. Next year should be a better year. And that's mostly because the progress on the vaccine. Now, even before we saw the current delays in getting the vaccine delivered, not delivered but administered to people, you have to keep in mind it's going to take some time for the vaccine to help the overall economy and to help the commercial real estate market in particular. I really don't expect to see a lot of economic improvement until the middle of the year maybe into the second half of the year. And that's just because until we have a large number of people vaccinated, it's just not going to be all that attractive to go out into places where you're in public and possibly having exposure.

Now, the issue with commercial real estate is it could actually continue to worsen through the first half of the year and even into the second half of the year, because things like vacancy rates and rents tend to be lagging indicators. So we're likely to see a tough slog in the first half of the year, but a better market in the second half of next year.

SEANA SMITH: And Calvin when we talk about this recovery, to bring it back to what we saw in 2008, 2009, it's totally different than what we're seeing now because we don't have that internal weakness that we had what, 12 years ago at this point. Is that going to help assist in a faster recovery do you think than what we saw from the last recession?

CALVIN SCHNURE: Yes. This is a very severe recession. It's very sharp. It's very deep. But what I focus on is not what did cause it, but what didn't cause it. Every other recession we've had have been because of internal weakness. You mentioned internal weaknesses. But there were things like if you had inflation and the Fed was tightening to slow the economy, or if you had excess investment, excess production, and you had inventories building up, you had stocks building up, or if you had excessive leverage. We haven't had any of those things.

So the real pillars of the economy in terms of bank balance sheets, household balance sheets, household saving, they are a lot stronger than they were, and a lot stronger than you would have expected, given just how severe this recession has been. What that means is as the economy begins to get going again, there's just a lot more internal strength to see the recovery in the second half of next year.

SEANA SMITH: Calvin, we got the latest COVID relief package. How big of a boost do you expect this to be to the economy? And are we going to need something more on the fiscal side here at some point in 2021?

CALVIN SCHNURE: Well, the additional fiscal support is certainly going to help on the macro sense. But it's really not the most important thing. Really, the most important thing is making sure that the vaccine gets out there. Overall GDP has recovered quite a bit, has rebounded quite a bit in the third quarter, but it's still about 3% below where it was a year ago. And it's uneven. It's very uneven. There's some parts of the economy that re doing well. We were talking about the housing market just a bit ago. If you look at retail sales for durable goods, they're above where they were a year ago.

The parts that are weak are the parts that are directly impacted. The travel, the hotel, some of the shopping areas, those are the areas that are weak. The additional fiscal stimulus is not going to help those areas until the pandemic is under control. What's really important, though, is this recession has been very uneven. It's been unfair. It's been unfair. Because the people who are most vulnerable in the economy were hurt the most. And those are the ones who are really relying on these additional spending, and also the state and local governments who need some support for their budgets because they're providing essential services.

So those aspects of the package to make sure that the really weaker as the economy don't struggle more are really critical getting through the next several months.

SEANA SMITH: So then Calvin, going off of that, and I know you're saying it's more of a vaccine story than what happens at least coming out of DC at this point. But there are that talks about the $2,000 direct payments to Americans. And I know within your note, I was going through a lot of the charts, and you did reference the personal income spending and what we have been seeing over the last several months.

How big of a boost do you expect that to provide just as we have seen the data come out more recently? And it seems like consumers are getting a little bit more concerned as we see the number of COVID cases continue to rise.

CALVIN SCHNURE: Well, actually you're referring to our economic outlook. And if viewers want to see, if you search Nareit 2021 economic outlook. We discuss the economy and real estate and reads. But the part of the difference of this recession has been the strong government policy impact that has kept household incomes from falling. And so that means there is a lot of reserve spending power that is ready to go when the economy gets going again.

The additional $2,000 is just going to put more impetus there. I actually think that just getting the $600 and the additional-- the $300 and the additional unemployment insurance is more critical than having the higher number for the overall spending. What's important is to get some out there to help the most vulnerable people.

SEANA SMITH: All right. Calvin Schnure. Always great to have you on the program. Senior economist with Nareit. We'll talk to you again soon. Have a happy New Year.

CALVIN SCHNURE: Thank you