Will The Economic Fallout From COVID-19 Mirror 2008?

The infamous U.S. financial crisis of 2008 rocked the world, resulting in global chaos and economic collapse. Markets hadn’t seen a crash of that magnitude since the Dot.com tech bubble burst in 1999. Then came along the novel Coronavirus (COVID-19). U.S Markets reacted negatively as confirmed cases rose around the globe, and panic spread like wildfire. The result; widespread pandemonium crushed markets to a level that hadn’t been seen since the 2008 recession. The massive sell-off in March of 2020 pushed down the Dow Jones Industrial Average to a loss of -23.2% in a single quarter as investors liquidated portfolios, desperate to cling onto capital. The DJIA hadn’t seen a poor performance like this since 1987, which should scare you. The COVID crisis has made us all aware of the vulnerabilities we possess as investors, and humans too of course. The pandemic caused severe financial turmoil globally. In the U.S, 30-40 million unemployment claims were filed as businesses were forced to reduce labor capacity in response to crippling shutdowns and COVID restrictions(1). Which leads me to the purpose of writing this blog post. In 2008, the housing bubble burst because banks were writing loans to people who shouldn’t have been qualified for mortgage payments (i.e bad credit, low income). When the banks could no longer collect on those loans because the borrowers simply couldn’t afford them, the market collapsed. To make matters worse, major investment banks like Lehman Brothers had been selling Credit Default Swaps (CDS) with the belief that lenders would never default. It was so bad that “In the months after the recession, the unemployment rate peaked at 10.0 percent (in October 2009)”(2). For comparison in 2019, the U.S saw the lowest unemployment rate in 50 years, 3.5% (bls.gov). Americans were doing very well. Which leads me to the saddest part of all this. In April of 2020, in the thick of the global pandemic and the ensuing lockdowns, the U.S unemployment rate rose to 14.4%(3). That figure should send a chill down your spine. A figure nearly 50% higher than rates during the ‘08 recession is troubling. As of November 2020, current statistics show the current rate sitting at 6.9% (bls.org). While that may seem like a glimpse of hope, all fifty U.S states saw a spike in mortgage delinquency rates this August, with Miami-Fort Lauderdale seeing the highest of 8.6%(4). Chief Economist at CoreLogic, Dr. Frank Nothaft, raises concerns about the national delinquency rate of “1.4%...the highest rate in more than 21 years and double the December 2009 Great Recession peak”(5). Are we in for another market crash? One would think that preventative measures are now in place to halt a repeat of 2008, right? Most major banks in the United States still sell Credit Default Swaps with adjusted rates, and as delinquency rates rise there should be logical cause for concern. Rising delinquency rates not only hurt the big banks but the common landlord too. In New York City, tenants in Crown Heights, “Are Organizing Against Evictions, as They Did in the Great Depression”(6). The result; the CDC just implemented a “Temporary Halt in Residential Evictions To Prevent the Further Spread of COVID-19”(7) citing public health concerns. While this may temporarily aid in preventing bakruptcy, how long can this realistically last? Many Americans who own real estate generate passive income and live comfortable lifestyles with the assurance that rent will be collected monthly. A majority of those landlords do not have another job, so what do they do? What if the CDC extends this order another year? This financial climate is not sustainable, and with the possibility of a second wave looming, the financial health of our nation hangs in the balance. Greed and fear are major market drivers, and currently, we have an abundance of fear. As we all know, 2020 has been an unpleasant and seemingly unforgivable year. With so much uncertainty surrounding the pandemic, nobody knows for certain what will happen next. 

Thank you all for reading.

Sources;

1. EMILY BENFER, DAVID BLOOM ROBINSON, STACY BUTLER, LAVAR EDMONDS, SAM GILMAN, KATHERINE LUCAS MCKAY, ZACH NEUMANN, LISA OWENS, NEIL STEINKAMP & DIANE YENTEL. “The COVID-19 Eviction Crisis: an Estimated 30-40 Million People in America Are at Risk.” The Aspen Institute, 16 Sept. 2020, www.aspeninstitute.org/blog-posts/the-covid-19-eviction-crisis-an-estimated-30-40-million-people-in-america-are-at-risk/.

2. Bureau of Labor Statistics. “The Recession of 2007-2009.” Bls.gov, Feb. 2012, www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf.

3. Kochhar, Rakesh. “Unemployment Rose Higher in Three Months of COVID-19 than It Did in Two Years of the Great Recession.” Pew Research Center, Pew Research Center, 26 Aug. 2020, www.pewresearch.org/fact-tank/2020/06/11/unemployment-rose-higher-in-three-months-of-covid-19-than-it-did-in-two-years-of-the-great-recession/.

4. “Loan Performance Insights Report.” CoreLogic, Aug. 2020, www.corelogic.com/insights-download/loan-performance-insights-report.aspx.

5. Dr. Frank Nothaft. “Loan Performance Insights Report.” CoreLogic, Aug. 2020, www.corelogic.com/insights-download/loan-performance-insights-report.aspx

6. Allison Dikanovic, Peter Senzamici. “Tapped-Out Tenants Take Charge as Landlords Pursue End Runs Around Eviction Moratorium.” THE CITY, THE CITY, 12 Nov. 2020, www.thecity.nyc/housing/2020/11/12/21561805/nyc-tenants-take-charge-eviction-moratorium.

7. CDC. “Federal Register Notice: Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19.” Centers for Disease Control and Prevention, Centers for Disease Control and Prevention, 2020, www.cdc.gov/coronavirus/2019-ncov/covid-eviction-declaration.html.