Economic Snapshot Overview by Dr. Reid Cummings - November 2020

Posted on November 30, 2020 by Dr. Reid Cummings
Dr. Reid Cummings

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Greetings, and welcome to the November 2020 Mobile Bay Economic Snapshot.

Reporting on Covid-19 effects on our regional economy has occupied our pages in recent issues. In July, we examined the booming residential Baldwin and Mobile County residential real estate markets. In August, we sought at Mobile and Pensacola airport executives’ comments to better understand how the pandemic has affected regional air travel. In September, we discovered that commercial real estate markets were holding their own despite downturns in the overall national economy. In October, we featured multiple national transportation data, highlighting logistical and supply chain opportunities for the Mobile region. This month, we turn toward mortgage lending, another critical aspect of our regional economy.

The Center's Assistant Director Jana Stupavsky’s newest dashboard illustrates Mobile and Baldwin County mortgage lending metrics for corresponding sales of new and existing single-family residential homes, condominiums, and commercial properties. Data show that total loan volumes for existing single-family residential mortgages hit a 5-year high earlier this summer, topping out at $97.5 million dollars in Baldwin County and $87.6 million dollars in Mobile County; monthly loan transaction totals also reached a nearly 2-year high in both counties. Reflecting Baldwin County’s bustling new home development activity, new home loans climbed to $48.9 million dollars, a 46.1% increase over the previous high set in June 2018; likewise, Baldwin new home loan transactions reached a 5-year high of 232 in June. Though loan volumes and transactions in both counties have fallen slightly since summertime peaks, activity remains brisk relative to the overall previous 5-year period.

Condominium loan volumes and transactions tell a similar story. Baldwin County monthly condominium loan totals reached a 5-year high of $45.6 million dollars in August. The 290 transactions closed in June 2020 was just barely under the 5-year high set in June 2017.

Commercial mortgage transactions fell initially during the early months of the pandemic, but since then, have trended higher. In Baldwin County, February’s monthly total of $24.5 million dollars remains its high point for the year. Baldwin’s monthly totals reached their low point in May at $3.9 million dollars, bounced a bit during the summer months, and finished September at $4.0 million dollars. A slightly different pattern occurred in Mobile County over the same time frame with a peak monthly total of $44.9 million dollars in February falling to a low of $3 million dollars in May. However, September monthly loan volumes reached their highest point in 4 years, finishing at $18.8 million dollars.

As promising as this news is, the question we have been trying to figure out is even though lending activity this year has done well in spite of the overall pandemic economy, what potential challenges or opportunities might we face in the months ahead? To help us sort things out, we posed a few questions to members of the Alabama Banker’s Association and are pleased to report a number of their members’ comments below. We are grateful to Scott Latham, ABA President & CEO, and Ashley Thomas, ABA Director of Leadership Development, for helping us put this together.

Our regional data indicate residential and commercial mortgage lending has been active so far this year. Looking beyond the Mobile-Baldwin region, how would you describe your market’s 2020 lending activity and what are your expectations for 2021?

“Despite the economic disruption from pandemic impacts, our residential mortgage lending activity held up pretty well in both bank portfolio as well as secondary market lending products across our five-state footprint. Locally, secondary or vacation homes play an important role in our residential mix in our coastal markets of Orange Beach, Gulf Shores and Dauphin Island. We continue to see good 1-4 family vacation home activity and buyers seemed to have a real preference for vacation cottage type single-family residences which provide more social distancing for owners. In the closing months of 2020, there are some noticeable increases in building material and labor costs, much of which is attributable to supply chain pressures caused by the fall hurricanes. That could slow down local housing starts a bit, but we generally believe 2021 will mirror the moderately robust activity experienced in 2020.” George L. Noonan, Regional President – Alabama, The First

 “Residential lending has been very robust as our customers are taking advantage of the record low mortgage rates currently available to refinance their current homes or purchase new homes. While commercial mortgage activity was slow for us in the middle part of the year, we have recently seen a significant uptick. We anticipate a strong finish to the year in new fundings of commercial mortgages, and our pipeline heading into 2021 is very deep. Therefore, we are very bullish on commercial and residential mortgage activity heading into 2021.” Michael D. Ross, President & CEO, CB&S Bank

“Locally, just like the data support, the market has been strong and never seemed to ‘miss a beat’ with the onset of the Covid-19. However, as we have experienced time and time again, these conditions are very cyclical and will slow down or come to an end at some point, so the question is how long the ‘boom’ will last. The market also is being helped or pushed by the extremely low interest rates, which were set artificially low to stave off economic collapse.” Hutch Thompson, President – Mobile, BankPlus

“Our lending activity has been very solid and has improved steadily beginning in the late second quarter of 2020. This has been both in the form of new projects and developments being started, as well as clients taking advantage of the current interest rate market to refinance their debt. We do have some client segments that are still reeling from virus-related challenges, although our overall client base appears to be faring well. We remain cautiously optimistic about 2021, believing that many fundamentals of our local economy are strong and poised to continue their run. However, we also acknowledge the very real risk of turbulence in certain sectors related to the virus and our fiscal and physical responses to it.” Clayton Legear, President & CEO, Merchants & Marine Bank

“Across the commercial real estate landscape, lending activity remained strong in some segments such as conventional multifamily, industrial, and self-storage. Not surprisingly, transaction volume for less Covid-resilient property types such as hospitality, retail, senior and student housing, and office has slowed considerably. There has also been a significant divergence of impacts within certain segments such as hospitality. For instance, travel and tourism-focused hotels in ‘drive-to’ markets have fared well in areas where Covid-related governmental restrictions have been relatively lenient. On the other hand, hotels catering to business travel, conventions, and hotels in tourism markets reliant upon air travel have seen drastic drops in operating performance. Under an optimistic scenario where a substantial percentage of the population is able to receive a vaccine in the first half of 2021, we would expect to see strong resurgence in transaction volume in some segments while the recovery path for others, such as convention center hotels, could be considerably more protracted.” William C. Hart, Jr., SVP/CRE Manager, Gulf Coast & Florida, Trustmark National Bank

In response to the coronavirus pandemic the Federal Reserve has pushed interest rates to record lows, but as recent reports point to a viable vaccine perhaps by next summer, how do you think the Fed will react?  

“We expect the Fed to continue their current accommodative policy, with near record low interest rates, through the end of 2022. While we are hopeful that a vaccine will be produced and widely used, we expect that the economy will take some time to fully recover from the strains of sustained shutdowns and significant shifts in consumer behavior, both in the US and abroad.” Clayton Legear, President & CEO, Merchants & Marine Bank

“I believe the Fed will maintain a ‘low interest rate’ posture for quite some time. While the recent reports of new vaccines are promising, even the most optimistic scenarios point towards a staged re-opening of the economy. The Fed will use monetary policy to keep rates low, but additional fiscal stimulus will be needed to support the economic recovery.” William C. Hart, Jr., SVP/CRE Manager, Gulf Coast & Florida, Trustmark National Bank

 “The Fed recently announced a radical shift in how it intends to govern monetary policy. In recent history, it has leaned toward raising rates when it began to see inflationary pressures as opposed to when inflation was actually running ahead of its desired target range. The Fed communicated a couple of months ago that it intended to focus more on employment data rather than inflation data to determine when it might raise or lower rates. Therefore, I personally don’t believe that the Fed will raise short term rates in reaction to the widespread distribution of a coronavirus vaccine. I don’t see the Fed raising short term rates until we see the record low levels of unemployment that were in existence immediately prior to the pandemic.” Michael D. Ross, President & CEO, CB&S Bank

“Our consensus is that the Fed will continue low interest rate policies as most economic analyses reflect national shortages of new housing stock in many markets, inflationary indicators are not prevalent, and continued economic stimulus for small and large businesses as well as the consumer side will continue to be a top priority for the Fed. That should all point to a continued low interest rate environment and stability in most sectors of bank lending. Federal Reserve policies implemented at the outset of the pandemic-caused recession were swift, decisive and most of all, highly impactful in providing for stable markets and promoting continuation of credit availability to businesses and consumers. That policy should continue in 2021.” George L. Noonan, Regional President – Alabama, The First

 “At some point it is a given that the Fed will have to raise rates. We may never see them this low again in our lifetime, which may be a good thing, signaling a stronger, stable economy. The Fed slashing rates to historically low levels was an extreme attempt to ‘save’ our economy, but in the long run, this can’t be healthy for the economy.” Hutch Thompson, President – Mobile, BankPlus

Lately we have seen multiple stories about impending ends to renters’ eviction moratoriums and mortgage forbearances. What will be some of the ramifications for banks and their customers as this unfolds in the months ahead?

“To date, our bank’s portfolio of multifamily rental projects has experienced little slippage in rent collections since the beginning of the pandemic. Certainly the longer the recovery takes, the more severe will be the impacts on household income, rent collections, and mortgage delinquencies. The CARES Act and other governmental measures have helped many households to continue paying rent or to continue making mortgage payments. The removal of  renters’ eviction moratoriums and mortgage forebearances will need to be met with additional fiscal stimulus to assist citizens before the recovery produces employment levels sufficient to phase out such measures.” William C. Hart, Jr., SVP/CRE Manager, Gulf Coast & Florida, Trustmark National Bank

“This is, without a doubt, a very significant risk that is receiving very little attention. We believe there is an increasingly strong likelihood that individual municipalities and states may take further action to extend these protections, especially in areas harder hit by Covid-19. This will certainly help those renters and homeowners impacted by loss of income. However, it will also worsen the final reckoning once all protections are removed. At the end of the day, the payments that have been deferred for both renters and mortgagees will have to be addressed to avoid further ripples in other areas of the economy among those who are due the payments.” Clayton Legear, President & CEO, Merchants & Marine Bank

“I can only speak for my banking experience, but the words I would use are ‘extremely nervous’ and ‘cautious’.” Hutch Thompson, President – Mobile, BankPlus   

“While bank loan portfolios have improved significantly since April, the industry should see an uptick in problem loans and foreclosure activity heading into 2021 as those loans that were under stress anyway prior to the pandemic ultimately end up in payment default.” Michael D. Ross, President & CEO, CB&S Bank

With a new President and Congress, what kinds of changes do you anticipate that may affect our current lending environment?  

“Based on the prior Obama/Biden terms, I think banks will see increased regulation and oversight. While regulation may be enacted to assist or protect consumers, in some instances, it seems to inadvertently have a negative effect on the consumer. Unnecessary or burdensome regulation in any business sector will hinder the ability to service customers.” Hutch Thompson, President – Mobile, BankPlus  

 “The stock market appears to have responded favorably to the apparent election outcome of a Democratic President and a split Congress—the implication is that this political reality will make it difficult for either party to enact significant policy changes. Two issues that the market, the real economy, and consequently, the lending environment, will be sensitive to are the next phase of fiscal stimulus (how much and when?) and Covid-19 vaccine timeframes (when and how rollouts will occur in terms of eligibility and access?) William C. Hart, Jr., SVP/CRE Manager, Gulf Coast & Florida, Trustmark National Bank

“Several of the heads of banking regulatory authorities have terms that run through 2022, which will help buffer significant changes to some extent. However, we do expect a return to a bank regulatory environment characterized by tougher regulations on banks from a consumer protection standpoint, and for this focus to creep in to small business and commercial lending as well. Several aspects of the near decade old Dodd-Frank Act have yet to be implemented that will impact business lending from a data collection and reporting standpoint, and we expect these to be pushed by the new administration. These new mechanisms will likely cause challenges for smaller banking organizations, and also lead to some reduction in flexibility in the commercial lending arena.” Clayton Legear, President & CEO, Merchants & Marine Bank

The economy continues to show strength in a number of areas—jobs and labor force participation, manufacturing and supply chain activity, and certainly housing and construction. As the economy continues to recover from the coronavirus recession, what is the banking industry’s view of the overall economy going forward?

“One structural change that we believe will continue in the commercial lending space for most banks is some softness for commercial projects anchored by larger retail space users and those in the hospitality industry. Both of these sectors have been dramatically impacted by the pandemic. Generally, we believe the banking industry views GDP growth as being relatively muted in 2021 as full deployment of the vaccine may not be felt in the economy until the 3rd quarter, but credit availability should not be a factor in GDP returning to more positive territory.”  George L. Noonan, Regional President – Alabama, The First

 “While the trends look promising, overall, the economic numbers are still historically scary, the number of Americans not working is concerning and the fear of a relapse of Covid could stall any progress made towards stabilization.” Hutch Thompson, President – Mobile, BankPlus

“We are very encouraged by the continued improvement in the economy since the second quarter and are cautiously optimistic about the future prospects for a furtherance of this trend. However, we do acknowledge that we remain below pandemic levels in many measures, and that we still face some potential headwinds as we look forward. Having a proven vaccine and treatment protocol will remove a significant portion of the risk we see, but we believe there will be some sustained macro shifts in consumer behaviors and employment that will present challenges for our economy going forward.” Clayton Legear, President & CEO, Merchants & Marine Bank

“The National Association of Realtors recently reported housing price increases in all 181 markets covered across the U.S. The coronavirus impact of ‘staying at home,’ combined with historic low interest rates, has led to a surge in housing prices and housing-related investments (i.e. furnishings, home improvement, retail sales). This trend has provided a much needed ‘shot in the arm’ for some retail segments. Businesses that were well positioned to distribute online pre-Covid have fared well during the pandemic and are well-positioned to prosper post-pandemic. As more clarity emerges about vaccines and a timeline for social and economic recovery from Covid-19, we believe business owners will begin making longer term investment decisions which have heretofore been postponed. In the CRE world, Covid-19 has amplified trends that were already well underway in the retail and office sectors. The shift to online shopping away from brick-and-mortar retail has gained significant momentum during the pandemic. Further, out of necessity, companies across the country have implemented major changes to allow employees to work remotely, a significant percentage of whom will never return to the office environment full-time. The relative permanency of these shifts has immense long-term implications for retail and office owners, as well as future development trends. In short, there will be both BIG WINNERS and BIG LOSERS in the post-Covid economy.” William C. Hart, Jr., SVP/CRE Manager, Gulf Coast & Florida, Trustmark National Bank

Nationally, the Federal Reserve has signaled they expect inflation to stay within a tight range over the next year or so. But from your market’s perspective, looking to 2021 and 2022, do you see any reasons to be concerned about upticks in inflation?

“The impacts from Covid-19 have been severe and we don’t believe there are significant near-term inflation risks for the economy at large. With the recent surge in home prices and construction costs, we expect there to be some continued inflationary pressures on products and services related to the residential housing industry, and while not a major concern at this stage, leading economic indicators related to the housing sector should be closely monitored to address the longer term risks of a housing bubble.” William C. Hart, Jr., SVP/CRE Manager, Gulf Coast & Florida, Trustmark National Bank

“We believe that inflation will not be much of a factor in the next several years. Energy prices should remain low, helping to positively impact manufacturing costs and many other sectors within the economy.” George L. Noonan, Regional President – Alabama, The First

“Looking at the overall picture, with so many pressing issues now, inflation has not been a topic discussed much at all, but it is always the ‘other side of the coin’ we have to worry about.” Hutch Thompson, President – Mobile, BankPlus

“We are carefully monitoring economic indicators in this space and would agree with the Fed’s overall assessment that inflation should remain low. However, we do expect that supply chain disruptions caused by virus-related shutdowns and challenges will lead to price escalations in a wide variety of industries going forward. An example of this is the recent run up in constructions costs fueled by rising costs in materials. While it appears, these will be limited in terms of scope and duration, there is certainly the possibility that some industry price escalations may be more sustained and may happen in tandem with escalations in other industries.” Clayton Legear, President & CEO, Merchants & Marine Bank

So, it seems that notwithstanding some areas of caution, area bankers’ commentaries suggest we are on track for continued economic recovery and robust lending activity in the year ahead. Though as we have learned in 2020, surprises can quickly change things. Our sincerest hope is that any which come our way will change things for the better all around.

Until next time, from everyone at the Center, we wish you and yours all the best.

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