Zillow Market Pulse: May 4, 2020

May 4, 2020

Almost half of recently surveyed small businesses said they would likely close in the event of a three-month lockdown. Millions of student loan borrowers were surprised to discover they don't qualify for government assistance. And California officially borrowed money from the federal government in order to buoy its state unemployment fund.

• Small businesses facing big challenges

  • A survey of 2,200 small businesses revealed 13% of them likely can't survive a lockdown of a month or more and 31% would likely close after a shutdown of 3 months.
  • Only 45% of respondents had applied for small business loans through the federal Payroll Protection Program.

• 7 million federal student loan borrowers don't qualify for government support

  • The recently passed CARES Act offered six months of interest-free payment suspensions for certain student loan borrowers.
  • But $170 billion in unpaid principal that is a subset of the main federal student lending program is ineligible for this relief.

• California becomes the first state to receive a federal loan in order to make unemployment payments

  • 3.7 million California residents have filed jobless claims since mid-March.
  • California's unemployment trust fund fell almost 40% from February to mid-April.

So what?

The nation's roughly 30 million small businesses – responsible for about 50% of U.S. GDP – have been hit particularly hard by the sudden economic stoppage caused by the coronavirus outbreak. And a joint survey from CNBC and Survey Monkey suggests a large portion of these businesses will struggle to survive. Of the 2,200 businesses surveyed in the week ending April 27, 13% said they could only survive less than a month in a lockdown like this and 31% said that their business would last for at most three months. Relief packages have been structured to offer support, but the deployment, application and distribution processes have all come under fire. Just 45% of small businesses applied for the relief through the government's Paycheck Protection Program, and only 13% of those were approved. More than half of the respondents said they have had to lay off or furlough staff in the last six weeks. And most business owners surveyed said they believe the crisis is unlikely to improve in the coming year. Only about two out of five small businesses said they expect their revenue to increase in the next 12 months, with an equal share expecting their revenue to decrease over the same period. Just less than out of every six expect their staff to increase over the next year, while more than one-in-five (21%) expect staffing to decrease.

In March, the $2.2 trillion CARES Act included a lifeline for student loan borrowers, offering a six-month, interest-free suspension of monthly payments The benefit was available to those borrowers of loans owned by the federal government – a $1.5 trillion program that holds loans for more than 40 million Americans. But a portion of these borrowers were recently surprised to find out that even though they were borrowing through the federal program, they were ineligible for the assistance provided through the CARES Act. Of the 43 million borrowers in the federal program, 7 million have federal loans held by banks or other private entities, rendering them ineligible for the program. Combined, these loans total about $170 billion in unpaid principal. "Ownership" of these loans was completely out of the hands of the loan borrowers – that decision was made by the applicants' colleges or universities. It's safe to say that some of the ~30 million jobless claims filed in the last month and a half were made by those with student debt, so this surprising development could prove devastating for those who were already scraping by.

Finally, California has become the first state to borrow from the federal government in order to continue paying unemployment benefits. Since the end of February, California residents have filed 3.7 million unemployment claims, and the fund used by the Golden State to make unemployment outlays has fallen by almost 40%. Other states — including some of the nation's largest —  have experienced similarly sharp reductions in unemployment reserves, and could be extremely vulnerable to quickly becoming insolvent if the recent surge in unemployment claims do not abate sufficiently. From the end of February through the first half of April, New York state distributed about 50% of the money it had available. In all, more than 20 states and jurisdictions do not have sufficient funding to support unemployment benefits through a year-long recession. Illinois and Connecticut are already considering similar actions as California, an early indication of the ongoing need for substantial direct federal support throughout the unemployment crisis.

 

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