COVID-19 and the Economy

Peoples Company hosts teleconference to discuss economic effects of the coronavirus.

About 10 days into the national quarantine that resulted from the coronavirus pandemic, Peoples Company hosted a teleconference to discuss the potential effects for the real estate and development market.

Eric O’Keefe, editor in chief of The Land Report, led the conversation. Steve Bruere, Peoples Company President, and Dr. Mark Dotzour, former chief economist at Texas A&M’s Real Estate Center, fielded questions and offered their perspectives on the economic consequences of the pandemic.

As O’Keefe mentioned, the pandemic occurred as the country was experiencing its longest bull market in history. The nearly immediate downturn in the stock market saw values plummet in just days, raising concerns that the long-predicted recession might be starting.

On the other hand, “The farm land market has been pretty resilient prior to this,” Bruere said, “and continuing low interest rates are another good sign.”

Bruere and Dotzour suggested that signs are mixed, making it even more challenging than normal to predict the long-term effects of the situation.

Dotzour jokingly said, “Keep in mind, I’m an economist, so there’s a 50% chance I don’t have a clue what I’m talking about.” But he said that his decades studying the economy enable him to speak fairly confidently about how various markets will respond in the coming months.

Crude Oil

“The COVID-19 outbreak occurred simultaneously, over the same weekend that the Saudi crown prince flooded the market to drive down crude oil prices,” Dotzour said. “That was like lightning striking twice.”

This move by the Saudi prince was the culmination of months of efforts by the Saudis to force crude oil production down so barrel prices would begin to rise. Dotzour said that when those attempts failed, the Saudis tried a different tack—dropping oil prices repeatedly to drive competitors out of the market. “It became a ‘last man standing’ deal, and the last man standing is likely to be either Saudi Arabia or Russia because their oil production companies are state-owned and won’t go bankrupt.”

United States oil production, however, is at risk because American companies are privately owned and won’t be able to survive if prices remain well under $50/barrel. “The one mitigating factor in this scenario is the political aspect,” Dotzour said. “I’m pretty sure President Trump has been putting pressure on the crown prince to quit interfering in the market. I imagine the President has been calling him and reminding him that if he wants help from the United States in the future, he needs to stop this now. There’s definitely some political maneuvering going on.”

Even so, Dotzour anticipates more United States oil companies will struggle, resulting in a substantial decline in United States oil production and increased prices over the next couple of years.


Typically, when the stock market is most volatile, investors will choose to buy gold or silver because either will hold its value better than other investments. But Dotzour said the gold market is another anomaly right now. “There’s evidence that gold prices are actually dropping. Big investors, who are having to cover huge margins in a short period of time, are looking for liquid assets to sell quickly, and gold is easier to sell,” he explained.

Real estate is considered a sound investment. But it takes longer to sell, so investors are not rushing to sell those investments.

Because there is “basically no inflationary pressure on Earth right now,” Dotzour said the market for land investment is actually good, even if prices have dropped. “If the land is low-risk and a new investor is comfortable that the land will offer a good return for the price, he or she isn’t going to be concerned that the price has been dropping.”

“With equities and bonds at a discount, people are looking at other options. The best move right now is patience. We have to wait out the present circumstances,” Bruere said.

Real Estate

The threat of an unprecedented rent moratorium is also causing investors to reconsider multifamily investments, which are normally a solid option. “A lot of apartment owners may be at risk financially right now,” Dotzour said. “The value of existing contracts is low because that force majeure event [the ‘act of God’ clause that can void a contract] has actually happened” if the government orders landlords to postpone rent collections.

Despite the dire messages in some areas, Dotzour said the refinance market is the silver lining in all this. “The refi market is the underlying, potentially powerful stimulator for the economy.”

Interest rates may drop below 3% before the calendar year is out. If that is the case, nearly every American is a potential candidate for refinancing. “Americans do not tolerate deferred gratification,” Dotzour said. “All that money saved by refinancing will be spent and put right back into the economy.”

The land development market isn’t completely closed. However, the new construction market could be slow to return to the highly optimistic outlook of late 2019.

“That underlying urge to buy a house is still there for most Americans, and if mortgage rates drop a little more, the real estate market could be back strong fairly soon,” Dotzour said. “I’m about as risk-averse as you could possibly be. But I’d say there could be some worthwhile investment here if a developer is solvent enough to develop at a slightly slower pace than normal, introducing just a few lots at a time until the market rebounds more fully.”

He said that after 9/11, he made an observation that applies to the current situation as well. “The American people are resilient, and they won’t live in fear for long. They’ll either fix the problem or they’ll get used to it and return to their normal activity.”

Bruere agreed. “This time of year is typically slow in the investment market, but we know there is capital looking to be invested. That will be even more true as the economy rebounds later in the year.”

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