What happens to the economy when the PPP runs out of money? This reader wants to know how another rise in unemployment will impact the economy.

Q: I tried to call in to WGN radio when Ilyce was on a couple of weeks ago. Do you think unemployment will skyrocket when the Paycheck Protection Program (PPP) money runs out? I know many business owners who will pay employees with PPP money for eight weeks then lay them off. I will be doing that with 25 percent of my employees. 

Can you guess at an unemployment rise number as the stimulus funds run out? I heard a restaurant guy in New York being interviewed.  He said that he has 600 employees who will get paid for the 8 weeks under the PPP. After that he plans to fire them and have them go on unemployment so he said, “What have we gained?” 

I think we are in for a huge increase in unemployment after the PPP money runs out, and I’m just wondering how you think this will affect the housing market, stock market, and the economy overall.

COVID-19: What Happens to the Economy When the PPP Runs Out of Money?

A: Other than the housing market, which we’ll get to in a moment, we don’t see any silver linings with the COVID-19 situation. As of this writing, more than 140,000 Americans have died (nearly 650,000 globally) since the pandemic began, 4 million Americans (and more than 15 million globally) have contracted the disease and any progress that was made in terms of containing the virus and opening the economy appears to be regressing.

In March, the nation’s leading health experts and economists reasoned that we could all stay put, take the economic hit, and let the virus run its course. We thought that the economic hit would be huge but would dissipate once the virus was under control. That hit was immediately reflected in the stock market plunge, negative economic indicators and historic unemployment numbers.

But now we’re in the middle of summer and the stock market is running extremely hot (especially certain tech stocks) while interest rates are at all-time lows. Around 32 million people are unemployed, and yet thanks to the unprecedented unemployment assistance, fewer people are defaulting on credit cards, mortgage and student debt payments this year than last year.

Housing Market Impact

So, what about the housing market? Well, even in 2019, we were in a sellers’ market, with not nearly enough homes being put on the market for all the buyers who wanted to purchase. After a momentary pause in March and April (when Sam saw new real estate deals come to a halt), it looks like the COVID-19 pandemic has intensified the desire many people have to buy a home. New research from the National Association of Realtors and other housing organizations shows that more than a quarter of all buyers are looking to move out of the city (a complete shift for Millennials and Gen-Zers, who were looking to stay in diverse, urban areas for the lifestyle benefits). They want a roomier house with some sort of outdoor space, and are willing to drive further to get it (especially if they can now work from home).

Home Prices, Buying and Selling

And the housing market is on a tear. It seems that people are trying to buy and sell as quickly as they can. Sam has experienced multiple bid situations on many of his deals. A quick internet search reveals anecdotal stories about home buyer bidding wars in Detroit, Milwaukee, and Greenwich, Ct. 

“The coronavirus hasn’t dragged home prices down; in fact we’ve seen just the opposite—prices are rising in spite of the pandemic,” said Brian Walsh, a Redfin agent located in Tampa, where the median home price was up 8 percent year over year in June. “Every house that is the slightest bit cute, fixed-up and priced right gets multiple offers–some up to 10 or 15. The winning offers are almost always all cash with zero contingencies.”

According to a report from Redfin, a real estate brokerage firm, median home prices were up 2.8 percent nationally to an all-time high of $311,300 in June, as buyers bid for the smallest number of homes for sale in history.

Ten years ago, in the throes of the Great Recession, the National Association of Home Builders took note of the fact that many small home builders went out of business, their land went back to the banks. Larger home builders merged in order to stay solvent. At the time, they said the U.S. will have a new home shortage someday. 

Well, that day is here. Between the hundreds of thousands of homes that went into foreclosure ten years ago and were bought by hedge funds as rental properties, homes that naturally reach the end of their use and need to be replaced, and the much tougher financing challenges developers face today when building single-family homes or condos (it’s far easier to finance rental property, so that’s what’s being built), there are simply not homes for buyers to buy. And, there still aren’t enough new homes being built to keep up with demand.

Economic Impact

As for the economy, it’s in tough shape here and around the world. Airlines are hemorrhaging money, tens of thousands of restaurants have closed permanently and those that are staying open have a hard time making enough money without eat-in diners (and their bar bills), entertainment venues have no business and sporting events are just starting up without fans in their seats. There’s a great deal of uncertainty as to what will happen in the near future, or until a COVIDvaccine is widely available. We do agree that unemployment is going to rise and stay high until then.

Was the Paycheck Protection Program a Waste?

As for the PPP program, we disagree that it was a waste. The PPP program was a well-intentioned subsidy designed to help employers keep their employees for about 8 weeks. Global health experts thought that would be enough time to get everything under control, and in many countries that was enough time. But the virus is raging in the U.S., and nothing here is back to normal.

If you got your PPP money in mid-April, it ran out in June. And, if you got it in mid-May, it ran out in July. Companies whose businesses are lagging will have to lay off workers or shut down. Cities and states dealing with trillion-dollar losses in revenue because people aren’t traveling as tourists or for business, spending money in restaurants or even driving, are starting to furlough and permanently lay off their employees. 

Ilyce was booked to speak at many conventions and conferences this year. Most of these have been canceled (she’s waiting to see what happens with the October events). These events affect tourism, hospitality, hotels, events, restaurants, shows, movie theaters, airlines, car rental companies, hotel and home booking sites, and money other businesses and then all the businesses that supply goods and services to those businesses. The ripple effect is huge throughout the economy. 

We live in an interconnected world. “Free” money can only go so far and do so much. But it is a lot better than nothing – no one will like what happens if the federal government decides to shut off the spigot. Like everyone else, we’re waiting to see what happens next.

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