April 14, 2020

Profits declined at two large banks as they braced for a slew of loan defaults, in a preview of what may be to come as the corporate earnings season begins. The global economy may decline by more in 2020 than in any year since the Great Depression. And rental demand is likely to slow, especially at higher price-points.

• Two large banks see profits fall as they prepare for a significant economic downturn

  • JP Morgan and Wells Fargo announced they are setting aside billions of dollars to cover expected losses from a surge in defaults on loans they have issued.
  • Most of the loans expected to default are associated with credit card borrowers and oil companies.

• IMF: The global economy may already be in the most severe recession since the 1930s

  • The International Monetary Fund said it expects the global economy to shrink by 3% in 2020, and the U.S. economy to contract by 5.9%.
  • The U.S. economy shrank by “just” 2.5% in 2009, the height of the financial crisis.

• The rental market is primed for a slowdown

  • Rental prices are likely to fall, mostly at higher price points, according to a study by Harvard’s Joint Center for Housing Studies.
  • Rental household formation has stalled in the last three years, growing only slightly in 2019 after two straight annual declines.

So what? 

Several large companies and banks are announcing their Q1 2020 earnings this week, offering insight into how these companies – and the industries they represent – are coping with the economic effects of the coronavirus outbreak. Today, both JP Morgan and Wells Fargo announced that they have set aside billions of dollars in order to cover potential losses associated with defaults on loans issued to consumers and corporations. Elsewhere, a survey conducted by Bank of America suggested that investor pessimism now sits at “extreme” levels, and that banks have stockpiled more cash reserves than at any time since 9/11. To be clear, none of these banks have seen a wave of defaults as of yet, but the fact that they are preparing for it and setting the stage for what could be an ugly few months in the economy is notable. After a historically bad March, the stock market has improved noticeably in the last week or two, seemingly unfazed by bad news and surging again today to near its highest level in five weeks. Upcoming earnings calls will help validate whether this recent market uptick was credible, or whether the market is due for another downturn.

A report today from the International Monetary Fund (IMF) suggests that the global economy is likely to decline by as much as 3% in 2020, the steepest decline since the Great Depression. As recently as January, the IMF predicted that the economy would grow by 3.3% in 2020. The IMF also predicted that the U.S. economy was due for a 5.9% decline in 2020, more than twice as severe as the 2.5% reduction in 2009, at the height of the global financial crisis. Given the wealth of bloody economic headlines in recent weeks, it’s sometimes easy to lose track of the fact that a full housing and economic recovery depends largely on medical progress and less on economic measures. A study released by researchers at Harvard predicted that, absent a substantial increase to critical care capabilities or the development of a vaccine, “prolonged or intermittent social distancing may be necessary into 2022.”

Lastly, while coronavirus-related developments in the for-sale segment of the housing market have been receiving the most attention lately, the rental market is also facing its own slew of challenges. Last week, we reported that about 30% of tenants failed to make their monthly rental payment in the first week of April (up from about 18% in March). Today, a report from Harvard’s Joint Center for Housing Studies suggested that demand for renting is expected to soften, which is likely to result in falling rents. Those falling rents may be welcomed by strained renters, but the benefits are unlikely to be felt by lower-income renters who already face lofty affordability challenges. According to the report, newly built units with high asking rents typically have lower absorption rates to begin with, suggesting that their occupancy rates are already low and might be harder to fill as household incomes take a hit.

Click here to read past editions of Zillow’s Market Pulse updates.