Mid-Year Real Estate Review - a webinar presentation by Paul H. Brewbaker, Ph.D., CBE TZ Economics, Kailua, Hawaii June 11, 2021

Mid-Year Real Estate Review
 a webinar presentation by
 Paul H. Brewbaker, Ph.D., CBE
 TZ Economics, Kailua, Hawaii
 June 11, 2021

 Copyright 2021
 Paul H. Brewbaker, Ph.D., CBE

The macroeconomic Big Picture through the lens of GDP

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 1

U.S. personal savings rate tells the story of 2020 COVID recession:
 higher precautionary savings equals lower consumption, GDP drop
 Percent of disposable personal income
 CARES Act

 30
 Lehman American
 Brothers COVID-19 Rescue
 Plan
 25
 U.S. recessions shaded

 20

 Payroll tax
 15 increase

 Tax
 10 rebate ARRA

 5

 0
 2006 2008 2010 2012 2014 2016 2018 2020 2022

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Source: U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org/series/PSAVERT), June 10, 2021.

Proximate cause of 2020 recession: pandemic-induced contraction in
 real personal consumption expenditure, especially on services

Trillion chained 2012 dollars (log scale) Trillion chained 2012 dollars (log scale)
 Food
7 9.0 1.0
 Services (left scale)
6
 8.0 0.8
 Food
5 Services
 Goods (right) 7.0 0.6
 COVID-19 COVID-19
4

 6.0
 2014 2015 2016 2017 2018 2019 2020 2021 2014 2015 2016 2017 2018 2019 2020 2021

 U.S. personal consumption expenditure Expenditures on food (goods) and food services

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 Source: U.S. Bureau of Economic Analysis (https://www.bea.gov/data/consumer-spending)

Because of federal fiscal stimuli—transfers—per capita Hawaii real
 income increased in 2020, while real output (GDP) decreased
 Thousand 2012 dollars
 60
 Per capita Hawaii real GDP

 55 GDP

 Personal income
 50

 Per capita Hawaii real personal income
 45

 40
 2016 2017 2018 2019 2020

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Sources: U.S. Bureau of Economic Analysis (https://www.bea.gov/data/gdp/gdp-state), U.S. Bureau of Labor Statistics (https://data.bls.gov/cgi-bin/surveymost?r9)

Sapped by stagnating Oahu tourism receipts from US$ appreciation in
 the mid-2010s, Hawaii real GDP growth was then pounded by COVID-19
 Constant, 2012 chain-weighted dollars: billion (left), trillion (right) 21
 2.3%
 COVID-19
 90 20
 Aloha Airlines U.S.
 shutdown (right scale) U.S.
 19
 85
 18
 80 U.S. recessions shaded

 17
 Hawaii
 75
 16
 Hawaii
 70 (left scale)
 15

 2006 2008 2010 2012 2014 2016 2018 2020 2022

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Source: U.S. Bureau of Economic Analysis (https://apps.bea.gov/iTable/index_nipa.cfm and https://www.bea.gov/data/gdp/gdp-state); regression of natural log of U.S. real GDP 2009Q2-2019Q4 by TZ Economics depicted 5
 with 2 standard error bandwidth (99 percent confidence interval), ( . . )= 1.246015 + 0.005716 where t is a time index in quarters.

Pre-Covid, Big Isle real GDP spent last decade in doldrums, Kauai
 recovery proved strongest during the 2010s; no post-Covid data yet
 Index, peak of 2000s cycle = 100
 123 Kauai
 120
 Maui Oahu 117 Maui
 U.S. recessions shaded
 115 Oahu

 101 Big Isle
 100

 80
 Kauai
 Big Isle

 60
 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

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Source: U.S. Bureau of Economic Analysis (https://www.bea.gov/data/gdp/gdp-county-metro-and-other-areas); indexing by TZ Economics

The macroeconomic Big Picture through the lens of GDP growth

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U.S. real GDP growth sharply reversed within 2020, strong first half
 2021 in NABE May 2021 forecast survey, FRB-Atlanta GDPNow est.
 Quarterly percent change at annual rates
 +33.4%

 30

 20
 SARS-CoV-2
 +9.3% (GDPNow)
 +8.5% (NABE)
 10
 +2.3% compound annual average, 2009-2019
 +6.4% +2.5% (NABE)
 0
 +4.3%
 −5.0%
 -10

 -20 U.S. recession shaded

 -30
 −31.4%

 2015 2016 2017 2018 2019 2020 2021 2022 2023

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Sources: U.S. Bureau of Economic Analysis (BEA) (https://www.bea.gov/data/gdp/gross-domestic-product), NABE May 2021 outlook survey (https://www.nabe.com/NABE/Surveys/Outlook_Surveys/May-2021-Outlook- 8
 Survey-Summary.aspx), Federal Reserve Bank of Atlanta (https://www.atlantafed.org/cqer/research/gdpnow).

Contributions to U.S. real GDP growth: consumption-led recession,
 fiscal stimuli-led rebound; 2021Q1 net 0.9 percent below end-2019

 Contributions to percent change in real U.S. GDP (quarterly at s.a. annual rates) +33.4%

 30
 C

 20
 +6.4%
 10 ∆ +4.3% Pers. Cons. (7.4%)
 ∆ ∆ (2.0%)
 0 ∆ −NX ∆inv (−2.8%)

 −5.0%
 −∆ Net exports (−1.2%)
 -10

 -20 −C

 -30
 −31.4%

 2018Q1 2019Q1 2020Q1 2021Q1

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Source: Bureau of Economic Analysis, U.S. Department of Commerce (https://www.bea.gov/data/gdp/gross-domestic-product), actual data through first quarter 2021.

Benchmarking real GDP to end 2019, Hawaii changes were most
 extreme in travel, tourism, entertainment, and recreation activities
 Hawaii real GDP by industry indexes (2019Q4 = 100)
 Agriculture
 125
 Military

 100 Other
 Retail, wholesale
 Agriculture

 75 Transportation

 Accom., food serv.
 Arts, ent., recr.
 50

 25

 0
 2019:Q1 2019:Q2 2019:Q3 2019:Q4 2020:Q1 2020:Q2 2020:Q3 2020:Q4

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Source: BEA, U.S. Department of Commerce (https://www.bea.gov/data/gdp/gdp-state); quarterly real data through 2020Q4 indexed to 2019Q4 = 100.

NAICS Hawaii real GDP growth composition through 2020Q4: tourism
 slammed, resident consumption contraction, recovery by late summer
 40
 +31.3
 30 Other
 Retail trade
 Arts, ent. recr.
 20 Health care
 State, county govt.
 10
 2.7 +2.1
 0.1 1.5
 0
 −1.0 Accommodation
 and food services
 -10
 −8.9
 -20
 Transportation
 -30

 -40
 −42.2
 -50
 2019:Q1 2019:Q2 2019:Q3 2019:Q4 2020:Q1 2020:Q2 2020:Q3 2020:Q4

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Source: BEA (https://www.bea.gov/data/gdp/gdp-state) quarterly Hawaii data posted March 26, 2021.

FOMC median annual real GDP growth forecasts, March 2021:
 will growth in 2021 make up for 2020 drop? Not in Hawaii, sadly
 Percent change, year-over-year +6.5%

 6
 U.S. recession shaded
 4
 Highest

 2 1.8%
 Lowest

 0

 -2

 -4
 −3.5%

 2014 2016 2018 2020 2022 2024 2026
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Source: Federal Open Market Committee, Federal Reserve Board (March 17, 2021) Summary of Economic Projections (https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210317.htm).

Post-COVID countercyclical federal fiscal policy

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Original Cares Act (March 2020) was rapid fiscal policy relief response
 of $2.2 trillion in support to businesses, individuals, governments

 Loans to corporations
 Small business loans
 Business tax reductions
 Airlines
 Direct payments to individuals
 Unemployment benefit enhancements
 SNAP and child nutrition, child and family services
 Individual tax reductions
 Housing
 Student loan deferments
 Hospitals and public health
 State and local governments
 Transportation and transit
 FEMA
 Education Stabilization Fund
 All other spending
 0 50 100 150 200 250 300 350 400 450 Billion $

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Sources: Committee for a Responsible Federal Budget (March 25, 2020) with CBO estimates (April 2020) (https://www.crfb.org/blogs/whats-2-trillion-coronavirus-relief-package, https://www.cbo.gov/publication/56334), 14
 SevenandForty (March 2020) (https://www.reddit.com/r/dataisbeautiful/comments/fppc7v/oc_where_the_money_goes_in_the_us_senates_2t/), JP Morgan (https://www.jpmorgan.com/insights/research/cares-act).

70% of business economists recommended ≥ $1 trillion (Jul. 2020);
 85% of business economists recommended ≤ $1.5 trillion (Mar. 2021)

 “What would be the optimal size for the next (federal) How much additional stimulus (g) needed to get U.S.
 fiscal package?” (g) (July 2020)* real GDP to pre-COVID peak? (March 2021)†

 g >$ 3.0 2%
 g > 3.0 9%
 $2.6 < g < $3.0 2%
 2.0 < g < 3.0 21% $2.1 < g < $2.5 2%
 $1.6 < g < $2.0 4%
 1.0 < g < 2.0 42%
 $1.1 < g < $1.5 24%
 g < 1.0 17% $0.5 < g < $1.0 39%
 g < $0.5 tril. 22%
 Dunno 12% Dunno 4%

 0% 10% 20% 30% 40% 0% 10% 20% 30% 40%

 *Following the CARES Act (March 2020) and the PPP Flexibility Act (June 2020)
 † In the American Rescue Plan, following the second-round stimulus included in the Consolidated Appropriations Act (December 2020)

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Sources: National Association for Business Economics (August 2020), “NABE Panelists Foresee Slow Recovery from Recession, Risk of ‘Double-Dip’; Most Deem Fed Policy Appropriate, but Hold Mixed Views on Fiscal 15
 Response, NABE Economic Policy Survey (https://files.constantcontact.com/668faa28001/65165cb5-5c8f-468d-8f5a-e80afc952435.pdf), and (March 2021) “NABE Panelists Are More Optimistic about GDP
 Growth in 2021, But Most Do Not Expect Job Market Recovery until 2023 or Later ” (https://www.nabe.com/NABE/Surveys/Outlook_Surveys/March_2021_Outlook_Survey_Summary.aspx).

December 2020 $900 billion supplemental provisions to Consolidated
 Appropriations Act refilled the tank on some prior CARES measures

 Paycheck Protection Program (PPP) loans
 Direct payments to individuals
 Unemployment benefits
 Business in low-income communities
 Live venues, theatres, museums
 Vaccines, testing, contact tracing, mental health
 State and local government public schools
 State and local government rental assistance
 State and local government higher education
 State and local government other education
 Farming and ranching direct payments
 SNAP
 U.S. Postal Service (loan forgiveness)
 Child Care Development Block Grant

 0 50 100 150 200 250 300 350 400 Billion $

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Sources: Congressional Budget Office (CBO) (https://en.wikipedia.org/wiki/Consolidated_Appropriations_Act,_2021, https://www.cbo.gov/system/files/2021-01/PL_116-260_Summary.pdf, 16
 https://www.cbo.gov/system/files/2020-
 12/Cost%20Estimate%20for%20Division%20M%20of%20H.R.%20133%20the%20Coronavirus%20Response%20and%20Relief%20Supplemental%20Appropriations%20Act%202021.pdf)

Biden Administration American Rescue Plan details ($1.895 trillion),
 ranked by 2021 outlay, emphasizes individuals, state governments

 Payments to individuals
 State and local governments
 Unemployment insurance enhancements
 Refundable child tax credit
 Schools and higher education 2021 2022-2023
 Direct COVID pandemic response
 Paid leave
 Small Business Opportunity Fund
 COBRA and ACA subsidies
 Rental assistance
 Veterans’ health
 Tribal governments
 Child Care Stabilization Fund
 Public transportation
 Nutrition (SNAP)
 Cybersecurity
 Mental health
 0 50 100 150 200 250 300 350 400 Billion $

 See also Jared Bernstein and Heather Boushey, Council of Economic Advisers (February 3, 2021) The Economics of the American Rescue Plan (https://www.whitehouse.gov/briefing-
 room/blog/2021/02/03/the-economics-of-the-american-rescue-plan/) and Congressional Budget Office (February 20, 2021) Estimated Budget Effects of
 the American Rescue Plan Act of 2021 (https://www.cbo.gov/publication/57012) Slide copyright 2021

Sources: Mark Zandi and Bernard Yanos (January 15, 2021), The Biden Fiscal Rescue Package: Light on the Horizon, Moody’s Analytics (https://www.moodysanalytics.com/-/media/article/2021/economic-assessment-of- 17
 biden-fiscal-rescue-package.pdf)

Consumers saved most of their CARES Act stimulus (like tax rebates
 2001, 2008; payroll tax increase 2012): how 2020 relief was allocated

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Source: Olivier Coibion, Yuriy Gorodnichenko & Michael Weber (August 2020) “How Did U.S. Consumers Use Their Stimulus Payments?” NBER working paper 27693 18
 (https://www.nber.org/system/files/working_papers/w27693/w27693.pdf)

2020 CARES assists to state/local governments, direct spending, boost
 to unemployment benefits: biggest bangs for federal deficit bucks

 Cumulative Effect on
 Pandemic-Related Policy and effects
 Effect on the Deficit Cumulative Effect on GDP per Dollar of Effect
 on Deficit and GDP, FY 2020-2023
 (Billions of Dollars) GDP (Billions of Dollars) on the Deficit (Dollars)
 Direct Assistance for State and Local Governments 150 132 0.88
 Other Spending Provisions 700 548 0.78
 Enhanced Unemployment Compensation 442 297 0.67
 Recovery Rebates for Individuals 292 175 0.60
 Other Revenue Provisions 425 157 0.37
 Paycheck Protection Program (PPP), Related Provisions 628 226 0.36
 Total 2,637 1,535 0.58

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Source: Congressional Budget Office (September 18, 2020 ) The Effects of Pandemic-Related Legislation on Output (https://www.cbo.gov/publication/56537).

NABE March 2021 Outlook Survey question: “Federal Reserve can
 prevent an economic slowdown absent near-term fiscal aid?”

 Yes 21%

 No 77%

 Don't know / not sure 2%

 0% 20% 40% 60% 80%

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Sources: National Association for Business Economics (March 2021) “NABE Panelists Are More Optimistic about GDP Growth in 2021, But Most Do Not Expect Job Market Recovery until 2023 or Later“ NABE Outlook 20
 Survey (https://www.nabe.com/NABE/Surveys/Outlook_Surveys/March_2021_Outlook_Survey_Summary.aspx).

March survey question: “What is the greatest downside risk to the
 U.S. economy through 2021, considering probability and impact?”

 Variant of coronavirus against which vaccines ineffective 67%
 Fiscal policy inaction/policy gridlock 10%
 Slow vaccine distribution 10%
 Other 6%
 A widening federal deficit 4%
 Substantial stock market decline or market volatility 2%
 Increasing number of bankruptcies
 Global growth slowdown
 Elevated continuing UI claims due to COVID-19
 Trade policy (increased protectionism)
 Monetary policy missteps
 0% 20% 40% 60%

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Sources: NABE March 2021 outlook survey (https://www.nabe.com/NABE/Surveys/Outlook_Surveys/March_2021_Outlook_Survey_Summary.aspx).

May survey question: “What is the greatest downside risk to the U.S.
 economy through 2021, considering probability and impact?”

 Variant of coronavirus against which vaccines ineffective 35%
 Slow vaccine distribution 21%
 Other 21%
 Substantial stock market decline or market volatility 12%
 Monetary policy missteps 7%
 Global growth slowdown 5%
 Corporate tax reform
 Individual income tax reform
 Increasing number of bankruptcies
 Elevated continuing UI claims due to COVID-19
 Trade policy (increased protectionism)
 Fiscal policy inaction/policy gridlock
 A widening federal deficit
 0% 20% 40% 60%

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Sources: NABE May 2021 outlook survey (https://www.nabe.com/NABE/Surveys/Outlook_Surveys/May-2021-Outlook-Survey-Summary.aspx)

Some U.S. monetary policy notes

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Monetary stabilization, accommodation of liquidity preference, fiscal
 stimuli expanded Federal Reserve asset purchases, balance sheet
 Trillion $, monthly averages)
8 $0.59 tr.

 Credit, liquidity facilities SARS-CoV-2
 Assets $2.22 tr.

4 Agency debt Mortgage-backed securities
 $5.05 tr.
 U.S. Treasury securities

0
 Federal Reserve notes in circulation
 $2.17 tr.

 Lehman Brothers fails Reserve deposits of depository institutions
-4
 $3.91 tr.
 Reverse repurchase agreements
 Liabilities and capital U.S. Treasury general account $0.42 tr.
 $0.91 tr.
 Other $0.45 tr.
-8
 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

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Sources: Monthly averages of weekly averages, Federal Reserve Board (Statistical Release H.4.1), compiled through week of May 19, 2021 (https://www.federalreserve.gov/releases/H41/default.htm)

Nominal U.S. Treasury yields: overnight rates at zero lower bound, as
 of March 17, 2021 FOMC projected to remain low through 2023
 Percent, adjusted to constant maturities
 P T P T*

 Lehman
 5 Brothers
 U.S. recessions
 Taper shaded gray
 Tantrum
 4
 COVID-19 FOMC median fed funds
 30-yr
 target rate projection
 Normalization

 3 10-yr

 2.5%
 30-yr
 2
 10-yr

 2-yr
 1
 Fed
 funds

 0
 2008 2010 2012 2014 2016 2018 2020 2022 2024
 *Unofficial (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions) Slide copyright 2021

Sources: Board of Governors of the Federal Reserve System (https://www.federalreserve.gov/datadownload/), Federal Open Market Committee (FOMC) (March 17, 2022) 25
 (https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20201216.htm).

Talk is cheap? If “everybody” is concerned about reviving 1980s
 inflation, then why don’t mortgage rates reflect the concern?
 16 Percent Test for “Granger Causality:”
 T-Note yield causes mortgage rate (F = 11.7660)
 Mortgage rate causes T-Note yield (F = 6.2032)
 14

 12
 30-year fixed rate mortgage rate
 10
 U.S. recessions shaded

 8

 6

 4
 3.0%
 10-year U.S. Treasury Note yield
 2 1.6%

 0
 1985 1990 1995 2000 2005 2010 2015 2020 2025

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Sources: Federal Reserve Board (data download https://www.federalreserve.gov/releases/h15/), Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States, retrieved from FRED, Federal Reserve Bank of 26
 St. Louis (https://fred.stlouisfed.org/series/MORTGAGE30US).

August 2020 update to FOMC Longer-Run Goals accepts that since 2014
 LR inflation expectations ≤ % leave room for symmetric reflation
 Term structure of inflation expectations (percent)*
 COVID recession

 30-year

 2 ∗ = 2

 1
 “When it gets a little warmer, it
 miraculously goes away”
 5-year D. Trump

 0
 “Following periods when inflation has been running
 persistently below 2 percent, appropriate monetary
 policy will likely aim to achieve inflation moderately
 above 2 percent for some time” FRB (August 2020)
 -1

 2008 2010 2012 2014 2016 2018 2020 2022
 *Nominal U.S. Treasury yields minus TIPS yields at same maturities
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Source: Board of Governors of the Federal Reserve System (https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15), monthly implied inflation expectations through May 2021 and Statement on Longer-Run 27
 Goals and Monetary Policy Strategy (August 2020) https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-
 strategy.htm)

U.S. and Hawaii CPI-U inflation: FOMC committed to PCE inflation
 averaging 2 percent, implies headline CPI inflation ≥ 2.5 percent
 “With inflation running persistently below this [2 percent] longer run goal, the
 Percent
 8 change, year-over-year [FOMC] will aim to achieve inflation moderately above 2 percent for some
 time so that inflation averages 2 percent over time and longer-term inflation
 expectations remain well anchored at 2 percent” (November 5, 2020)

 6
 U.S. recessions shaded COVID-19

 4
 Honolulu
 2.5%
 2

 0
 9/11
 U.S. urban average

 -2
 Lehman
 Brothers

 1995 2000 2005 2010 2015 2020 2025
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Sources: Federal Reserve Board (https://www.federalreserve.gov/newsevents/pressreleases/monetary20201105a.htm), U.S. Bureau of Labor Statistics (https://data.bls.gov/cgi-bin/surveymost?r9), data through 2021Q1; 28
 quarterly interpolations or averages calculated by TZ Economics.

The CPI is an index, so a low value one year ago—say, because of a
 pandemic—makes a high value one year later seem unusually high
 Indexes, 1982-84 = 100
 Counterfactual: Hawaii @2%
 COVID-19 since 2016 (right scale)
 275
 300
 270
 U.S. Urban Average (left scale)
 265
 290
 260

 255
 280
 U.S. recession shaded
 250

 245 Urban Hawaii (right scale)
 270

 240
 2017 2018 2019 2020 2021

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Source: U.S. Bureau of Labor Statistics (https://data.bls.gov/cgi-bin/surveymost?r9); beginning in November 2017 the Urban Hawaii CPI-U switched from semi-annual reporting to bi-monthly frequency, only the latter is 29
 illustrated here; the U.S. CPI-U is published monthly

Inflation is measured as the annual percent change in the index; and
 supply chain disruptions (from a pandemic) cause transitory inflation
 Percent change, year-over-year
 4.99%
 COVID-19
 U.S. Urban Average
 4
 3.75%

 2

 Urban Hawaii
 0

 U.S. recession shaded

 -2
 2017 2018 2019 2020 2021
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Source: U.S. Bureau of Labor Statistics (https://data.bls.gov/cgi-bin/surveymost?r9), to facilitate comparison semiannual inflation rates for 2017 and most of 2018 are included with the newer year-over-year inflation 30
 estimates for Urban Hawaii inflation at bi-monthly frequencies.

U.S. economic forecasts (and monetary union) provide insight into
 likely price inflation scenarios this year and next, even for Hawaii

 Median forecast 2021 2022
 percent changes 2021 2022 Lowest 5 Highest 5 Lowest 5 Highest 5 n

 Q4/Q4
 Core PCE deflator 2.2 2.1 1.6 3.2 1.7 2.6 45
 PCE deflator 2.6 2.2 2.2 3.6 1.7 3.3 43
 GDP implicit price deflator 2.7 2.3 2.1 3.3 1.7 3.0 45
 CPI-U 2.8 2.3 1.7 3.7 1.6 3.2 45
 Real U.S. GDP 6.7 2.8 4.1 8.1 2.2 4.8 46

 Annual average
 Real U.S. GDP 6.5 4.4 5.0 7.3 2.9 5.6 49

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Source: National Association for Business Economics (May 24, 2021), “NABE Panelists Boost Forecast for GDP Growth in 2021; Expect Current Inflation to Moderate by Year-End” (public summary available at 31
 https://www.nabe.com/NABE/Surveys/Outlook_Surveys/May-2021-Outlook-Survey-Summary.aspx).

COVID-19, Work-From-Home (WFH) point to not-so-nuanced shifts

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FRB Atlanta (May 2020) survey results: “the share of working days
 spent at home is expected to triple after the COVID-19 crisis ends”

 Pre-Crisis Work From Home Post-Crisis Work From Home

 5
 days 5 days
 3.4 10.3

 Never 90.3% Never 73.0%
 2-4
 2-4 days
 days
 9.9
 3.4

 1 d.
 1 day
 2.9
 6.9

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Source: Federal Reserve Bank of Atlanta Macroblog (May 28, 2020), “Firms Expect Working from Home to Triple,” FRB Atlanta Survey of Business Uncertainty. 33
 (https://www.frbatlanta.org/blogs/macroblog/2020/05/28/firms-expect-working-from-home-to-triple)

January 2021 NABE member survey of firms: Did your company
 implement new work from home policies due to the health crisis?

 All employees Most employees Some employees
 35.5% 30.1% 19.4%

 No employees n.a.
 10.8% 4.6%

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Source: National Association for Business Economics (https://nabe.com/NABE/Surveys/Business_Conditions_Surveys/January_2021_Business_Conditions_Survey_Summary.aspx); survey question asked of 34
 respondents January 4-12, 2021 was, “Did your company implement new work from home policies due to the health crisis?”

Survey of firms: “Compared to expectations before Covid (in 2019)
 how has working from home turned out?” (Four survey waves, 2020)

 Hugely better 19.0%

 Substantially better 21.2

 Better 20.8

 About the same 26.2

 Worse 6.9

 Substantially worse 3.1

 Hugely worse 2.7

 0 5 10 15 20 25 Percent

 n = 2,500 (May, July, September/October 2020), 5,000 (August)

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Source: Nicholas Bloom on working from home: will it persist? (https://www.youtube.com/watch?v=N8_rvy-hqUs), Princeton Bendheim Center for Finance, working paper by Jose Maria Barrero, Nicholas Bloom, and 35
 Stephen J. Davis (January 2021), “Why Working From Home Will Stick,” posted at https://nbloom.people.stanford.edu/sites/g/files/sbiybj4746/f/wfh_will_stick_v5.pdf.

Related WFH impact of Covid: increased investment in IT equipment
 and software; remote work, fiscal stimuli, private savings/investment

 Quarterly annualized growth rates (%)
 23.7

 20
 19.1

 10 11.4
 8.8

 0

 Covid
 recession

 -10
 2015 2016 2017 2018 2019 2020 2021

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Source: U.S. Bureau of Economic Analysis, Private fixed investment in information processing equipment and software [A679RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; 36
 https://fred.stlouisfed.org/series/A679RC1Q027SBEA, May 19, 2021.

Monthly U.S. private non-agricultural business applications for federal
 Employer ID Number: post-Covid entrepreneurship unleashed?
 Thousand monthly new business applications for a federal EIN, s.a.

 500

 400
 U.S. recessions shaded

 300

 COVID-19

 200

 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
 *Applications for an Employer Identification Number (EIN), except for applications for tax liens, estates, trusts, certain financial filings, applications outside of the 50 states and DC
 or with no state-county geocodes, applications with certain NAICS codes in sector 11 (agriculture, forestry, fishing and hunting) or 92 (public administration) that have low
 transition rates, and applications in certain industries (e.g. private households, civic and social organizations). Slide copyright 2021

Sources: U.S. Census Bureau, Business Applications: Total for All NAICS in the United States [BABATOTALSAUS], retrieved from FRED, Federal Reserve Bank of St. Louis; 37
 https://fred.stlouisfed.org/series/BABATOTALSAUS, June 8, 2021, seasonally-adjusted data through April 2021.

U.S. workers who teleworked or worked at home for pay specifically
 because of COVID-19, excluding those who did pre-pandemic*

 Percent of workers 25 and over by educational attainment

 70 68.9

 60 Advanced degree
 53.5
 50
 College graduate
 40 40.6
 37.4

 30 29.9
 25.1 Total
 Some college
 20 19.8
 15.3 High school graduate
 12.2
 10 Less than high school
 5.2 6.2
 2.4
 0
 2020.06 2020.09 2020.12 2021.03

 *Or those whose telework was unrelated to the pandemic.
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Source: U.S. Bureau of Labor Statistics (monthly) through April 2021; supplemental data measuring the effects of the coronavirus (COVID-19) pandemic on the labor market (https://www.bls.gov/cps/effects-of-the- 38
 coronavirus-covid-19-pandemic.htm and https://www.bls.gov/web/empsit/covid19-table1.xlsx).

Bubbliciousness

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GameStop daily stock prices—meme bubble—detached from economic
 fundamentals; expectations-interdependency (social media attention)
 Daily closing price, $/share (log scale) Meme Bubble
 Overshooting with oscillatory
 convergence
 200
 140
 +2 
 100
 60
 −2 
 40
 Covid recession Recovery
 20
 14
 10
 6
 4

 2
 Jun. 2020 Sep. 2020 Dec. 2020 Mar. 2021 May 2021

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Source: Yahoo Finance (https://finance.yahoo.com/quote/GME/history?p=GME); interval regression by TZE from August 5, 2020 – December 17, 2020, projected through May 19, 2021

Look familiar? Not GameStop prices, Nevada housing valuations:
 early-2000s Sub-Prime Bubble, overshooting, oscillation to trend?
 FHFA Nevada housing valuation index, 2020 = 100 (log scale) +2 

 100
 Sub-Prime −2 
 Bubble
 80

 Overshooting with
 60 oscillatory
 convergence?

 40

 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

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Source: Federal Housing Finance Agency (https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#qat); 1982-2002 interval trend regression by TZE projected through 2025 with an 41
 estimated quarterly annualized appreciation rate of 3.25 percent

A couple different ways post-Covid Oahu single-family and residential
 condominium market segments diverged in recent performance

▪ Single-family median prices exploded; condo median prices languished (“$1 meellion” headline)
▪ Sales dropped after Covid appeared, but rose shortly there after in both segments, however:
 1. Listings dropped more for single-family homes one year ago
 2. Sales dropped more for condominiums one year ago
 3. Consequence: inventory/sales ratios (stocks/flows) rose for condos, not for single-family
▪ Another reflection: ordinarily correlated months-of-inventory remaining suddenly uncorrelated
▪ Worse yet: Covid in 2020 “piled-on” the scrum created by Honolulu City Council, “putting
 undocumented vacation rentals in cages” in 2019—Murphy’s Law (let’s crack down on Oahu
 vacation rentals after thirty years of not enforcing their prohibition, what could go wrong?)

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Oahu median home prices below trend after mid-2018; duality post-
 COVID: single-family price break-out, condo medians still below trend
 Thousand dollars, s.a. (log scales)
 $985k 1,000
 COVID-19

 4.0% 900
 Single-family (right scale)
 800
 5.1%
 500
 700
 450 $458k

 400

 350
 Condominium (left scale)
 U.S. recession shaded
 300
 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

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Sources: Honolulu Board of Realtors, monthly data through May 2021; seasonal adjustment and trend regression (January 2012 – June 2018) by TZ Economics; trend annual appreciation rates were 4.0 percent for single- 43
 family homes and 5.1 percent for condominiums, each depicted with 2 standard-error bandwidth (99 percent confidence interval).

Ratio of quarterly new condo listings to sales (seasonally-adjusted)
 sticky downward 2019, jumped post-Covid; dropped sharply 2021Q1
 New listings / sales (ratio; quarterly (s.a.))
 U.S. recession shaded

 1.6

 Condominium
 1.4

 1.2
 City enhances
 enforcement of
 COVID
 Like a new inventory/sales ratio 1989 vacation
 rental ban
 1.0
 Single-family

 0.8
 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

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Sources: Honolulu Board of Realtors; quarterly data through 2021Q1, seasonal adjustment by TZ Economics

Oahu months of inventory remaining re-synchronizing following six
 quarters’ divergence, from mid-2019 to end-2020; idiosyncrasy?
 Months of inventory remaining, monthly, s.a. City enhances
 enforcement of
 1989 vacation COVID U.S. recession shaded
 rental ban
 4.0

 3.5

 3.0

 2.5

 Condominium
 2.0

 1.5
 Single-family
 1.0
 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

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Sources: Honolulu Board of Realtors; monthly data through May 2021, seasonal adjustment by TZ Economics

Post-Covid housing valuation outcomes relative to longer-term trends

▪ How to recent price movements fit into de-trended home price movements over four decades?
▪ Here’s your recipe, have your kids try this at home; fun for the whole family:
 1. Extract the long-term trend in median home prices since 1980
 2. Calculate the difference between actual and long-term trend prices: de-trended prices
 3. Use your eyeballs, or math, to extract the cycle
 4. What remains is the non-cyclical portion of prices (extract the trend, then extract the cycle)
 5. What happened to this residual in the last year?

Answer: confirms what you see in the underlying price data, it’s all in SF home prices

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Regression of (log change) of Oahu median single-family home prices
 on time 1982Q4-2018Q4, associated projection through 2022
 Thousand dollars, s.a. (log scale)
 4.66% p.a.
 1,000
 800 U.S. recessions shaded Sub-Prime
 Bubble
 600
 500
 Japan
 400 Bubble

 300

 200

 100
 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

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Sources: Honolulu Board of Realtors, quarterly data through 2021Q1; seasonal adjustment and trend regression on stationary component of home prices (first differences of natural logs) by TZ Economics

Regression of (log change of) Oahu median residential condominium
 prices on time, 1980Q1-2018Q2, associated projection through 2024
 Thousand dollars, s.a. (log scale)
 500
 400
 Sub-Prime
 Bubble
 300
 250
 Japan
 200 Bubble

 150

 100

 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

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Sources: Honolulu Board of Realtors, quarterly data through 2021Q1; seasonal adjustment and trend regression on stationary component of home prices (first differences of natural logs) by TZ Economics

Detrended Oahu median single-family home prices (variation around
 the long-term trend estimated in the previous slides)
 Thousand dollars

 150
 U.S. recessions shaded

 100

 50

 0

 -50

 -100

 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

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Sources: Honolulu Board of Realtors, quarterly data through 2021Q1; seasonal adjustment and trend regression on stationary component of home prices (first differences of natural logs) by TZ Economics

Detrended Oahu median residential condominium home prices (their
 variation around the long-term trend estimated in previous slides)
 Thousand dollars relative to trend, s.a.

 60

 40

 20

 0

 -20

 -40

 -60

 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

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Sources: Honolulu Board of Realtors, quarterly data through 2021Q1; seasonal adjustment and trend regression on stationary component of home prices (first differences of natural logs) by TZ Economics

Decomposition of Oahu median single-family home price trend
 residuals 1982Q4-2021Q1 into cyclical, non-cyclical components

Thousand dollars, s.a. Thousand dollars, s.a.
 Sub-Prime
 Bubble
 80
 Japan
 80
 Bubble Zounds!
 40
 40
 0
 0
-40

 -40
-80

 1980 1990 2000 2010 2020 1980 1990 2000 2010 2020

 Cyclical component Non-cyclical component
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 Sources: Honolulu Board of Realtors, quarterly data through 2021Q1; seasonal adjustment and trend regression on stationary component of home prices (first differences of natural logs), using a Christiano-Fitzgerald 51
 asymmetric band-pass filter with short:long parameters set at 30:84 (quarters), assuming stationarity I(0)

Decomposition of Oahu median residential condominium price trend
 residuals 1982Q4-2021Q1 into cyclical, non-cyclical components

Thousand dollars, s.a. Thousand dollars, s.a.

40
 Japan Sub-Prime 40
 Bubble Bubble
20
 20
 0

-20 0
 Meh
-40
 -20
-60

 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

 Cyclical component Non-cyclical component
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 Sources: Honolulu Board of Realtors, quarterly data through 2021Q1; seasonal adjustment and trend regression on stationary component of home prices (first differences of natural logs), using a Christiano-Fitzgerald 52
 asymmetric band-pass filter with short:long parameters set at 36:84 (quarters), assuming stationarity I(0)

Remember: your mileage may vary

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Oahu single-family home price appreciation by neighborhood in 2020:
 post-COVID shift to exurbs and suburbs from Honolulu’s urban core

 North Shore
 Hawaii Kai
 Aina Haina-Kuliouou
 Makakilo
 Kailua-Waimanalo
 Mililani
 Moanalua-Salt Lake
 Wahiawa
 Makaha-Nanakuli
 Pearl City-Aiea
 Ewa Plain
 Makiki-Miliili
 Waipahu
 Windward Coast
 Waikiki
 Kalihi-Palama
 Wailae-Kahala
 Kaneohe
 Downtown-Nuuanu
 Kapahulu-Diamond Head Percent changes
 Ala Moana-Kakaako
 -15 -10 -5 0 5 10 15 20

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Source: Honolulu Board of Realtors (https://members.hicentral.com/images/Documents/msr/LMU_Dec2020.pdf)

Oahu condominium price appreciation by neighborhood in 2020:
 more of a post-COVID West Side tilt, plus vacation rental fire-sale

 Waipahu
 Makaha-Nanakuli
 North Shore
 Wahiawa
 Ewa Plain
 Aina Haina-Kuliouou
 Mililani
 Makakilo
 Pearl City-Aiea
 Ala Moana-Kakaako
 Makiki-Miliili
 Kailua-Waimanalo
 Moanalua-Salt Lake
 Hawaii Kai
 Kalihi-Palama
 Windward Coast
 Wailae-Kahala
 Kapahulu-Diamond Head
 Kaneohe
 Downtown-Nuuanu Percent changes
 Waikiki
 -10 -8 -6 -4 -2 0 2 4 6 8 10

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Source: Honolulu Board of Realtors (https://members.hicentral.com/images/Documents/msr/LMU_Dec2020.pdf)

Maui County SF median home price appreciation during 2020 by hood
 not inconsistent with vagabond (remote) workers and Zoomtowns

 Molokai (+42.6%)
 Lahaina
 Kapalua
 Kaanapali
 Haiku
 Hana
 Wailea/Makena
 Napili/Kahana/Honokowai
 Pukalani
 Wailuku
 All Maui County
 Kihei
 Kahului
 Kula/Ulupalakua/Kanaio
 Makawao/Olinda/Haliimaile
 Lanai
 Maui Medows
 Spreckelsville/Paia/Kuau
 Olowalu
 -60% -40% -20% 0% 20% 40%

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Source: Realtors Association of Maui (https://www.ramaui.com/market-statistics/)

Not to be left out: Maui County 2020 residential condominium price
 appreciation also favored Molokai, West Maui (Lanai small sample)

 Lanai → +340%
 Spreckelsville/Paia/Kuau
 Molokai (+14.4%)
 Kapalua
 All Maui County
 Kaanapali
 Napili/Kahana/Honokowai
 Wailea/Makena
 Kihei
 Lahaina
 Pukalani
 Kahului
 Wailuku
 Maalaea
 -10% 0% 10% 20% 30% 40%

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Source: Realtors Association of Maui (https://www.ramaui.com/market-statistics/)

Kauai single-family median price surge over $1 million and ongoing
 stagnation in condominium valuations: segment-specific factors?
 Monthly in dollars, s.a. (log scale) +2 

 1,000
 Single-family
 800
 −2 

 600

 400

 Condominium
 COVID-19

 200
 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

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Sources: Hawaii Information Service, Hawaii Association of Realtors (https://www.hawaiirealtors.com/wp-content/uploads/Trends/2020/2020-Annual-Statewide-Statistics-Report.pdf), Kauai Board of Realtors 58
 (https://www.kauaiboard.com/Kauai-sales-statistics-2/); Hawaii DBEDT (http://dbedt.hawaii.gov/economic/mei/); seasonal adjustment and trend regression (June 2012 – June 2018) by TZ Economics.

Slopes are percent appreciation: curve in 2010s was a deceleration of
 Big Isle price appreciation, stall from volcano, with moves after Covid
 Quarterly, thousand dollars, s.a. (log scale)
 $798k (KOA)
 U.S. recessions shaded

 Kona
 500
 Kilauea East
 400 Rift eruption
 $319k (ITO)
 300
 Hilo $301k (KAU)
 250
 200
 150
 Ka’u COVID-19
 100

 2008 2010 2012 2014 2016 2018 2020 2022

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Sources: Hawaii Information Service; seasonal adjustment and trend regressions by TZ Economics.

Valuation dynamics even further across space: 2020’s bubble?

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Median single-family existing home sales prices exhibiting post-Covid
 surges reminiscent (echoes) of lift-off before 2000s Sub-Prime Bubble
 Quarterly, thousand dollars, s.a. (log scale) $1.2m SFO
 $987k LIH
 1,000
 Sub-Prime $798k KOA
 U.S. recessions shaded
 Bubble $667k LAX

 500
 400
 $319k ITO
 300 $301k Ka’u

 200
 150
 COVID-19
 100

 50
 1990 1995 2000 2005 2010 2015 2020 2025
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Sources: Hawaii Information Service, National Association of Realtors (https://cdn.nar.realtor/sites/default/files/documents/metro-home-prices-q1-2021-single-family-2021-05-11.pdf), California Association of Realtors 61
 (https://www.car.org/en/marketdata/data/housingdata); quarterly data through 2021Q1, seasonal adjustment by TZ Economics.

Keep monitoring: normalized prices—each relative to own 30-year
 averages—now distinctively hint at post-Covid bubbliciousness
 Standard deviations
 Sub-Prime
 U.S. recessions shaded Bubble
 2

 1

 Dot.com
 0

 -1
 COVID-19

 -2

 1990 1995 2000 2005 2010 2015 2020 2025
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Sources: Hawaii Information Service, National Association of Realtors (https://cdn.nar.realtor/sites/default/files/documents/metro-home-prices-q1-2021-single-family-2021-05-11.pdf), California Association of Realtors 62
 (https://www.car.org/en/marketdata/data/housingdata); seasonal adjustment by TZ Economics.

Alles in Ordnung or “Too Soon To Tell?”

▪ A certain bubbliciousness has crept into Oahu single-family home prices
 1. Condos not so much, suggesting this is idiosyncratic to detached dwellings, not “housing”
 2. Another victim: urban core valuations (but she who laughs last…, etc.)
 3. Low mortgage interest rates matter but they don’t differentially affect housing segments
▪ Work-From-Home (WFH WTF) suddenly has changed lot of things
 1. Flight to suburbs, exurbs, “Zoomtowns” in rural America (a.k.a Kauai); one-time shift?
 2. Less office space? More space in the office (distancing)? More collaboration space?
 3. “Macy’s, Bloomies, Nordstrom’s; pick any two?” ; “Strip mall or last mile fulfilment, pick one.”
▪ Nicholas Bloom (Stanford) vs. Ed Glaeser (Harvard): an ongoing urban economics debate
 1. Work from home here to stay or just a thing people do at Microsoft, Google, and Apple, now?
 2. Triumph of the City: if rents fall in urban core as Boomers abandon, will Millennials swarm in?
 3. Hybridization: in-person collaboration rocks, commuting sucks; maybe a little of both?

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When we used blackboards this might picture the post-Covid flow of
 housing demand; does Oahu housing supply respond this fast?

 Single-family housing demand
Post-Covid
 Flows

Pre-Covid

 COVID-19 Time

Post-Covid
 Stocks
 Proportion of workforce
 working remotely
Pre-Covid

 COVID-19 Time

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What do valuation dynamics tell us about pre-/post-Covid markets?

 ▪ Common characteristics of asset pricing bubbles: (a) detachment from economic fundamentals;
 (b) information asymmetry; (c) herding; (d) expectations of other traders’ expectations
 ▪ Currently, Hawaii housing is not experiencing a meme bubble (GME, AMC, cryptocurrencies)
 1. Fundamentals consistent: low interest rates, economic recovery, strong balance sheets
 2. Transitory biological event; investors looking to longer-lived assets as safe havens
 3. Unique Covid impact: The Donut Effect,* demand moving to suburbs, exurbs, Zoomtowns
 ▪ Local evidence of home price bubbliciousness strongest on Kauai, possibly Kona SF, not condos
 ▪ Novel coronavirus SARS-Cov-2  novel changes in housing demand and supply
 1. Tourists absent for 6-12 months—so much for that vacation rental (drop in condo demand)
 2. Remote work / work-from-home (WFH) new source of SF demand—vagabond workers
 3. Demographic change and net out-migration: medium- to longer-term factors
 4. Limited supply / regulatory barriers: fewer for sale listings, constrained building (verb)

*Arjun Ramani, Nicholas Bloom (January 2021) “The donut effect: How COVID-19 shapes real estate,” Stanford Institute for Economic Policy Research SIEPR
 Policy Brief, cite several phenomena: (a) High-density urban rents fell since start of pandemic; (b) housing demand shifted from urban centers to suburbs, but
 not substantially from more to less expensive cities; (c) working from home caused commercial occupancy rates, property prices to fall; (d) falling urban Slide copyright 2021
 property values were likely driven by more skilled residents leaving high-value properties, with consequences for city budgets 65
 (https://siepr.stanford.edu/research/publications/donut-effect-how-covid-19-shapes-real-estate).

Pau

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