With all the borrowing through the CARES Act and the trillions of dollars being given out in assisting U.S. companies and citizens through the tumultuous times over the last three months, it could have been an even worst-case scenario of total chaos and even greater economic upheaval and disruption without it. The government has borrowed more in 2020 that it has compared to the 2008 market implosion of the economy.
It appears that real estate with historically low interest rates and huge pent-up demand and also from those leaving New York City has come back quite well with contracts and pending sales increasing markedly during May and June. As dangerous and lethal as the virus has been, consumers are out there are forging ahead and purchasing homes. Prices are predicted to continue to increase due to historically low inventory.
It all seems so much better, but my concern is how is the immense increase of trillions of dollars to our national debt going to be repaid? Currently, all our debt is greater than the gross domestic product of our U.S. economy and will most likely get worse over the next few years before it gets better. We are at approximately 106-110 percent of GDP, which some experts say is too high and some feel it isn’t. Both parties have ideas as to reducing the debt by cutting spending, which will not happen currently due to such division between the Democratic House and Republican Senate. It’s a no brainer that putting people back to work will increase GDP, while others think raising taxes on the wealthy is another solution, but it also has to be balanced with eliminating waste in the budget.
The United States is like a kid with a credit card, whereby we keep spending but never realize that we have to eventually pay back the money. Most important is spending on the creation of jobs for building and repairing our bridges, roads, tunnels, high-speed rail, and public buildings. This will successfully occur through increasing educational programs. Today further reductions are warranted in our bloated military programs, which was the opposite during WWII when necessary increases in military spending worked as an economy booster. However our information and technology economy today is completely different and in addition to construction-based jobs, we need a greater number of technologically educated workers for those jobs who will earn a livable and sustainable wage to potentially purchase a home.
Real Estate, for now, appears in excellent shape from the increased demand from those who can buy due to the historically low interest rates. Most important, construction must be ramped up as quickly as possible to satisfy demand that has been consistently outpacing available supply over the last eight years. One of the huge issues that could affect real estate in the future is that our country has always been in a deficit spending mode since its inception. One of the few times we had created a surplus was in the 1990s when there were tax increases, (Presidents George Bush and Bill Clinton) reduced defense spending as had been done since 1987 and a huge economic boom that created a windfall of tax revenue that completely reduced our debt.
The timing for Bill Clinton as president could not have been more perfect for him and then while in his second successful term in 1998 we had four years of surpluses. But some give credit to Newt Gingrich, speaker of the House, and his GOP-controlled House and Senate as they were able to create a budget that reduced spending as well as raising taxes on higher incomes and also assisted in cutting the deficit in four years (not the seven that was proposed) by also reducing spending on certain social programs. However, over the years Social Security, Medicare, and Medicaid have added the greatest part to the national debt.
But as long as the American Dream of homeownership is alive and well and the demand is there for purchasing homes, condos, and co-ops, the economy should improve. But controlling the Coronavirus will be a key factor in our success and will only be accomplished by people understanding that they must stop being selfish and self-centered and follow the CDC guidelines in wearing masks and social distancing until successful vaccines are made.
We need to balance the ratio and percentage of debt/GDP ratio in somewhat of a controlled fashion by having a more robust economy through the creation of more hi-tech jobs. Educating those to be employed for those new jobs as well as those positions in rebuilding our infrastructure should enable the United States to weather the storm. If the economy (GDP) increases fast enough and stays ahead of our deficit and debt and we can somehow through non-partisan cooperation in the House and Senate work towards a balanced budget and not waste money on unnecessary conflicts and wars around the globe as well as our health-care system, things can and will improve and we will succeed going forward. Real Estate will surely continue to be the benefactor as the economy improves as more and more laid-off workers are rehired, more businesses are created and Washington steps in to continue to do its job to steer and navigate our country back to where it was before Covid-19.
The Committee for a Responsible Federal Budget put out an eye-opening article on April 13, while our economy was shut down.
Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S). Just email or snail mail (regular mail) him with your ideas and suggestions on future columns with your name, email, and cell number and he will call or email you back. For a consultation, he can be reached by cell: (516) 647-4289 or by email: [email protected] to answer any of your questions or concerns.