Mortgages in the Gig Economy

When the skyrocketing threat of the COVID-19 virus departs – and not soon enough – mortgage finance will have to analyze and understand what are the long-term implications of yet another Black Swan event. 

As is the norm with these Black Swan events, the gaping holes in our system are revealed, presenting huge problems that must be solved before we can return to better times.The biggest concerns center around employment. If jobs and companies disappear overnight how do we underwrite the ability to repay? A thirty-year mortgage may only last seven years, but our shift to a gig economy means that employment is even more short lived. 

One report found that only four percent of Uber drivers completed their first year. And it is only a matter of time before Uber, one of the ultimate technological disruptors, deploys autonomous vehicles replacing those needy humans. How do we project an individual’s income more than a few years out in such an unstable environment?

Debt-to-income ratios should potentially be tightened to account for the sudden shocks that leave borrowers stranded. Today when 40 percent of families have no cash reserves and companies are at historic levels of indebtedness, it will be important to save us all from ourselves. If jobless claims can soar to 3.28 million in a single week – vastly eclipsing the old mark of 695,000 in 1982 – some sort of buffers or cushions are desperately needed. We can’t rely on $2 trillion bailouts.

The stimulus bill pushed forward last week by congress and the administration was huge. However, it only buys time for our wonderful medical professionals, hospitals and research scientists to treat us and ultimately to shield us with vaccinations. But the rapidity with which the pandemic has cratered the global and the US economies is truly unnerving. In response, and with atypically great speed, it would appear as if central banks around the world are also working together to pull out all stops to loosen monetary policy.  

Still, the continued erosion of good jobs and the fragility of the economy, is being demonstrated by:

  • The unprecedented speed in which people are being thrown out of work, as evidenced in the 3.28 million new jobless claims announced last week.
  • The potential for new, more efficient consumer behaviors to become entrenched, displacing many workers for the longer term in the process.
  • The lack of the sturdy and stable corporate giants in the U.S. to absorb the shock of Black Swan events.GM and Chrysler were bailed out in 2009, with Boeing.and undoubtedly many others, needing life support this time. The average life of an S&P corporation is now 20 years – down from the 60 years that was enjoyed in the 1950’s. 

Are We all in the Gig Economy Now?

Gig workers are independent contractors who have no company benefits and, therefore, no safety net for threats such as COVID-19. Contract programmers used by Wall Street firms may make upwards of $400,000 per year, but that is Unicorn-like status. As companies hollow out and there is a surplus of people striving to make a living, sub-minimum wage jobs with no benefits will become the norm. According to Forbes, 57 million people participate in the Gig economy – a number that is sure to grow. 

Treasury Secretary Steven Mnuchin has warned that unemployment could reach 20 percent  in the second quarter – double that of the Financial Crisis and just short of the Great Depression.  The two biggest industry sectors in terms of employment are Retail Sales (15.6 million jobs) and food and beverage (14.3 million jobs). Because all non-essential areas of the economy have or are being shut down, stores and restaurants suffered almost immediately and have laid off hundreds of thousands of workers.  

The Financial Crisis saw the elimination of 8.7 million jobs over a two year period. The recovery was slow and drawn out with non-farm payrolls finally catching up to 2008 six years later – much longer than any post-war recession. Labor participation rates remain low at 63.3 percent, on par with Ukraine and Chile. In the same timeframe, high-wage manufacturing jobs have also shrunk primarily due to the rise of automation, global competitors and global supply chains.

More lasting damage could be done to job creation by the forced immersion we are getting in the robustness of internet services. The internet bubble swelled based on the notion that companies like Amazon would disintermediate expensive “brick and mortar” establishments. Amazon has clearly won as it was the most disruptive engine of the “Retail Armageddon” and as further evidenced by a recent announcement that it is hiring 100,000 employees to aid us in the search for hand sanitizers and everything else. Given Amazon’s efficiency ratios are triple the productivity of traditional retail, this will mean that 300,000 laid-off workers won’t be hired back.

Other examples of disruptive Internet based services that will negatively impact job formation include:

  • Home Delivery of Food -This includes groceries and prepared meals through services such as GrubHub. Also the hybrid solution of custom meal kits such as Blue Apron. These were formidable competition to restaurateurs before the edicts to close, including the advent of Ghost Kitchens, which have risen quickly to serve cost conscious millennials by efficiently providing dinners home delivered without the need to open dining rooms and to hire waiters.
  • TeleMedicine – , This is where doctors, nurses and physician assistants can work from safer locations and, like those in their waiting rooms, can avoid infection from the sick. Buried in the bail-out package is legislation which will relieve doctors from some of the legacy state and local regulations which prevented this very needed advance. However, it will reduce the need for receptionists (about the last place where these jobs exist) and administrators. 
  • Live Entertainment and Movie Theaters – These are being supplanted by Netflix et al. Theatre ticket sales peaked in 2002 and then declined by 20 percent before we learned about social distancing. 
  • On-line Curricula – The need to shelter in place will demonstrate the efficacy of computer based courses at both the K-12 level and post-secondary. The potential to bend the curve in tuition costs exists if the educational establishment chooses to leverage these tools.

The Internet is just more efficient as it off-loads all the customer interaction work on the customer, including the ability to learn about products, select, price, pay, organize delivery options and, even promote/advertise through volunteered recommendations. Customer support is limited, if available at all, and technical support consists of Frequently Asked Questions. Disintermediation is virtually complete.

What this means is that the deterioration of job quality will accelerate. Artificial Intelligence, robotics, autonomous vehicles and ecommerce will each and together continue to marginalize the jobs that humans do. This will leave humans to bid their services through internet platforms described as the “Gig Economy” of which Uber is the prime example. Uber drivers are thought to average only $9.21 per hour and will be hit harder economically by the virus as we all self quarantine. They are being encouraged to shift to UberEats to deliver meals to homes, but that will only absorb a fraction of the estimated 900,000 drivers in the US.

Homeownership: A Virus Casualty?

Some economists – no doubt influenced by the temporary nature of employment – have been advocating renting rather than owning a home. Workers should be free to pursue opportunities across the country rather than be saddled by a home they can’t sell. This makes sense from a purely financial standpoint – if employers can only make a tenuous commitment to the security of their workforce it would be a mistake to take on an expensive long-term obligation. 

However, this mindset  will come at a huge societal impact. 

As former Treasury Secretary Larry Summers put it. “Nobody ever washed a rental car. No one will be as committed to a community in which they lack a meaningful stake.”

This problem will become far more evident when we are able to move past the crisis and assess the longer term impact. Sorry to sound such depressing notes, but I’m suffering from too much self-quarantine. 

Please be safe!

Bill Kelvie

Bill Kelvie, a Mortgage Media Advisor, has had a long and varied technology career as a programmer, strategist, CIO of Fannie Mae, and CEO and founder of Overture Technologies. He currently is an advisor to technology start-ups and publishes a blog on technology disruption at AWWEW.com