National Economic Outlook - December 2013

National Economic Outlook - December 2013

Written By:
Ingo Winzer, President

Local Market Monitor

Revised estimates of Gross Domestic Product for the third quarter show the economy growing at a 3.6 percent annual rate. This is encouraging but it's not proof of better growth, because inventories increased and personal spending decreased. If consumers don't buy stuff, those bigger inventories will just sit there.

It's easy to read too much into GDP details, but two developments may have longer-term importance for real estate values. One is that state and local government spending is picking up, after years of cutbacks. The other is that there isn't yet much new home construction. Renewed state and local spending will provide more jobs - and demand for housing - while the lack of new construction means that prices for the housing that already exists will be going up.

To a large extent, the home price increases that have been recorded in many markets in the last year or two are the result of investors buying up housing cheap and either flipping it or turning it into rentals. There hasn't been much demand for new housing. But this means that when demand again picks up it will quickly run up against an insufficient supply and that will mean years of sustained price increases.

Continuing the same level of growth we've had for months, the number of jobs in November was up 1.7 percent from last year. Jobs were up 3.4 percent in business services, 3.3 percent in restaurants, 3.0 percent in construction, 2.2 percent in retail trade, 1.7 percent in healthcare and 0.7 percent in manufacturing. Government jobs were flat, a small increase at the state and local level offset by a loss of federal jobs.

National Economic Outlook - November 2013

Written By:
Ingo Winzer, President

Local Market Monitor

It's difficult to know how much the government shutdown affected the jobs figures for October, which are mainly measured at mid-month. Government employees are counted as employed even if furloughed, and the loss of private sector jobs - from reduced government spending - is probably spread throughout the economy.

The number of jobs in October was up 1.7 percent from last year, continuing the pace of previous months. Jobs were up 3.5 percent in business services, 2.5 percent in retail trade, 3.4 percent at restaurants, 1.6 percent in healthcare and basically flat in manufacturing and government.

The relatively low growth in healthcare jobs is worrying because the sector is so large, with 20 million jobs. Early last year the rate of job creation in healthcare was 2.4 percent, at the start of this year it was 2.0 percent, and now it's 1.6 percent. Healthcare has been one of the few areas where people with low skills can find low-paid but stable jobs that allow them to become renters.

A different snapshot of the economy comes from GDP figures for the third quarter, which showed the economy growing at a 2.8 percent rate. Small but significant contributions were made by exports and by increased state and local spending, which we haven't seen for years. 

National Economic Outlook - October 2013

National Economic Outlook - October 2013

 

Written By:
Ingo Winzer, President

Local Market Monitor

The government shutdown means there are no statistics for us to analyze or comment on. So it's a good time to discuss the reliability of the data we use to understand real estate markets.

The most well-know statistic for real estate is home prices; particularly, how much home prices have changed in the past year. Sophisticated methods use actual sales data to calculate this number for the country as a whole and for local markets.

A very big problem right now is that the sales data do not tell us how the value of the average house changed in the past year, because many of the actual sales in the past year were not of average homes. They were sales of foreclosed properties.

The contamination of the data with foreclosures makes it seem that home values are sharply higher in many markets, and that the housing bust is quickly turning into another boom. I believe, instead, that we are in for a long period of very modest value increases that only becomes apparent once the foreclosures are washed out of the system.

We won't know for a while.

National Economic Outlook - September 2013

National Economic Outlook - September 2013

 

Written By:
Ingo Winzer, President

Local Market Monitor

The rate of annual job growth in August, 1.7 percent, was basically the same as in previous months. We had better get used to the idea that this is the new normal, because there probably won't be much help from the lagging government and construction sectors.

Budget difficulties will prevent any meaningful increase in government spending, even though local and state revenues are now in better shape. The recession revealed the extent of unfunded pension liabilities for public employees, which will absorb any extra dollars.

The expected recovery in the construction sector is running up against new realities that will slow hiring. One of these is the falling homeownership rate, currently 65 percent - down from 69 percent in 2004-05 - and almost certainly going lower. Falling homeownership just means that more people rent, but for jobs in construction it means slow hiring because apartments can be built with fewer workers. Despite higher home prices this year, only 65 percent of new building permits were for single-family homes, by far the lowest percent in a decade.

Another unhappy reality for construction is that the number of potential home buyers will be restricted for years because so many existing homeowners are either directly underwater with their mortgage or are so far in debt with home equity loans that it amounts to the same thing. When you owe more than your home is worth, you can't afford to sell it, which means you can't afford to buy a new one, either. Americans took on $600 billion of home equity debt and have paid down only 20 percent of that.

Jobs were flat in manufacturing, despite more car production, as consumers move away from PCs. Jobs in retail were up a solid 2.7 percent, jobs in restaurants an even better 3.5 percent. Business services jobs were up 3.4 percent, healthcare jobs up 2 percent. The unemployment rate dropped to 7.3 percent.

National Economic Outlook - August 2013

National Economic Outlook - August 2013

 

Written By:
Ingo Winzer, President

Local Market Monitor

The pace of job growth in July was unchanged from the 1.7 percent annual rate of previous months, but the details suggest an economy that will do modestly better for the rest of the year. Most importantly, jobs in business services were up 3.5 percent from last year.

Business services is one of the largest sectors of the economy, on a par with health care and government, and bigger than retail or manufacturing. Earlier this year it was growing at a 3 percent rate, in the last few months around 3.5 percent; it seems only a small increase but it means that businesses are expanding again.

A slightly disturbing sign is that jobs in manufacturing, which were growing at a 2 percent rate early this year, are now not increasing at all. New jobs in car manufacture are offset by job losses in computers and electronics.

In other sectors, jobs were flat in government, up 1.8 percent in health care, up 2.4 percent in retail, and up almost 4 percent at restaurants. We've noted before that many of these jobs have low pay, boosting rentals more than home buying.

Unemployment fell to 7.4 percent. Gross domestic product grew 1.7 percent in the second quarter. Fortunately, government spending was not down as much as in the first quarter, but surprisingly large imports took 1.5 percent off what otherwise was very good growth.

National Economic Outlook - July 2013

 

Written By:
Ingo Winzer, President

Local Market Monitor

 

Better estimates of Gross Domestic Product show that the US economy grew 1.8 percent in the first quarter, despite a negative 1 percent drag courtesy of the government. Consumers did their part, with 1.8 percent growth, businesses added 1 percent in the form of equipment, inventories and construction, which would have yielded a solid 2.8 percent growth if government had just kept spending flat.

Maybe we can only cut government spending when everything else is already going poorly, so we all suffer the pain.

 

Notably missing in GDP so far is any meaningful pickup in construction. But that may soon change because the soft pickup in housing demand will shortly run up against the hard fact that very little was built in the last five years. The fact that home prices have bottomed out in most local markets shows that very little excess inventory is left.

 

An encouraging sign is the 3 percent increase in construction jobs in the past year. Two million construction jobs were lost in the recession - that's a lot to make up for - but 200,000 reappeared in the last 12 months.

Overall, jobs since last June grew 1.7 percent. In addition to construction, there were gains in retail trade, 2.1 percent; business services, 3.2 percent; health care 1.9 percent; hotels and restaurants, 3.4%; and even finance, 1.5 percent. But jobs were almost flat in manufacturing and government.

College Costs and the Housing Market

Written By:
Ingo Winzer, President

Local Market Monitor
 

If you just took out a home equity loan to fund your daughter's college education, would you be in the housing market anytime soon, either buying or selling?

 

If you just graduated from college with $30,000 of debt, would you be saving up to buy a home anytime soon? How about if you graduated from law school but now owed $100,000?

 

College costs and the government loan programs that have aided and abetted what amounts to an extortion racket will dampen the housing market for a generation. To get a good job you need a degree, so colleges have raised prices with impunity. Can't afford it, kid? Go borrow from your Uncle Sam. No wonder college expenses have soared far above what's needed to provide a decent education.

 

Unlike the health care system, where payers like insurance companies and Medicare act as a brake on costs, the college education system has no brakes at all. $100 billion is added every year to an outstanding student debt level of $1 trillion. If nothing is done, this monster will wreck the housing industry.

National Economic Outlook

Written By:
Ingo Winzer, President

Local Market Monitor
 

The economic recession only lasted a year, but there wasn't a recovery for homes because prices had climbed much too high and builders had built way too many of them. Prices had to fall, not just back to a "normal" level, but to an even lower level so that the large inventory of excess homes could be moved - a sort of clearance sale. We're not yet done with that sale - see the large number of mortgages still delinquent - but enough has been cleared out so that prices can drift up to a more normal level.

 

The accuracy of home price statistics is questionable right now, because of the large number of foreclosure sales, but the overall situation is clear. Prices are up in 42 percent of the 315 markets we cover, falling in just 9 percent. A year ago, prices were up in 14 percent of our markets, still falling in almost half. The corner has definitely been turned.

How quickly this housing recovery will proceed is still not clear, however, because of the tenuous finances of homeowners - whose $500 billion of equity loans keeps them out of the housing market - and the slow pace of job growth that deters new home buyers.

The number of jobs in May was up 1.6 percent over last year. Jobs were up 0.4 percent in manufacturing, 1.7 percent in retail, 1.9 percent in health care, 3.3 percent in restaurants, and 3.6 percent in business services. Government jobs were down 0.3 percent because of big cuts at the federal level.

 About 45 percent of the 2.1 million new jobs created in the past year are in fields like retail, restaurants and health care that pay low wages. (The overall percent of low-paying new jobs is much higher.) The people who have these job will not be buying a house, they will be renting. We are in for a long period where renting is the preferred option of new job holders.

Who's Telling the Truth? (a look at different home price indexes)

Written By:
Ingo Winzer, President

Local Market Monitor

 

Whose home price data should you believe? The National Association of Realtors says home prices in the past year were up 11 percent. Case-Shiller says the increase was 9 percent. The FHFA says 7 percent. And the FHFA purchase and refinance index, which we use, says 2 percent.

Each of these sources has weaknesses. The Realtors report the median price, which can change if a different mix of homes is sold. Case-Shiller mainly has data from large cities and uses county records that include foreclosure sales. The FHFA indexes exclude cash sales and non-conforming mortgages, and report older data.

If we want to know how much the value of the average home has changed, I think the FHFA purchase and refinance index is the best bet right now, because it includes a smaller percent of foreclosure sales, which have very little to do with the average home. The Realtors report that 25 percent of home sales in the first quarter involved foreclosures.

 During normal times, the four indexes line up pretty well, but these are not normal times. 

Understanding Real Estate - Art or Science?

Written By:

Ingo Winzer, President

Local Market Monitor

It's not science, although the vast amounts of calculation and statistics make it seem that it should be. Wall Street is brimming with math PhDs and how well did that work out?

 A science gives the same boring answer every time. Water always boils at 212 degrees F, and it doesn't matter if it's today or tomorrow.

 If the value of properties or mortgages could be calculated scientifically, there would never be any buying or selling because everybody would arrive at the same correct answer.

 It's precisely because real estate analysis is not a science that large amounts of money exchange hands. Opinions differ about current and future values, and we have recently seen how large the differences can be, trillions of dollars worth.

 To avoid the next debacle - or to capitalize on todays opportunities - don't look for evermore intricate calculations, look for some better art.

National Economic Outlook

Written By:

Ingo Winzer, President

Local Market Monitor

The economy continues to improve at the same moderate rate we've seen in recent months, with total jobs up 1.6 percent over last year. Jobs grew 0.7 percent in manufacturing, 1.7 percent in retail trade, 2.0 percent in health care, 3.1 percent at restaurants, and 3.4 percent in business services. The slow growth in manufacturing is a disappointment, but a reflection of the sorry state of the global economy, which currently doesn't need more airplanes or mining equipment.

 

Jobs in the government sector decreased 0.4 percent, 70,000 jobs at the federal level. This is small potatoes compared to the 2 million jobs gained overall, but the impact of lower government spending is much greater than the loss of government jobs. The gross domestic product, adjusted for inflation, grew at a 2.5 percent annual rate in the first quarter of this year, but would have grown at a 3.3 percent annual rate if government spending had just remained flat, never mind providing any stimulus. In the last quarter of 2012, lower government spending took 1.5 percent off GDP. If government continues a drag on the economy, we're looking at very modest grow in the next few years.

Foreclosures Skewing Home Prices?

Written By:

Ingo Winzer, President

Local Market Monitor

Beware the recent data on home prices. Has the value of homes in Phoenix really risen 25 percent in the past year? Atlanta, up 13 percent? Las Vegas up 15 percent? Is a new boom underway in markets that just a couple of years ago were epicenters of the real estate crisis?

Or are the home price figures skewed in these markets by the large number of foreclosures finally working their way through the system? Foreclosure law varies from state to state, but in Arizona foreclosure sales go to the highest cash bidder except that the mortgage lender can make a "credit bid" that usually is much higher than the actual market value of the home, often the full amount of the mortgage.

If foreclosure sales are now a bigger portion of all home sales than before, these "credit bids" will give the illusion that market prices are rising.

The Context of Risk In Mortgages

Written By:

Ingo Winzer, President

Local Market Monitor 

The traditional calculation of risk in real estate - the likelihood that a property will lose value or that a mortgage will default - is similar to the experience-based methods used by the insurance industry. If one percent of mortgages defaulted in the past, it's reasonable to assume that one percent will default in the future.

This approach works well as long as the context of the real estate market - the larger economic circumstance - doesn't change. But if the context changes, even the best experience-based calculations can be overwhelmed by other forces.

During the boom years of the mid-2000s, Fannie Mae, Freddie Mac, mortgage bankers, investment bankers and the rating agencies all relied on traditional historical data to tell them how much risk to assign to the large numbers of sub-prime mortgages being packaged and sold to investors. And they all were wrong, spectacularly so, because they failed to see that default data from periods of steadily rising home prices no longer applied when home prices had become too high; they didn't see that the context had changed.

The context of risk can change for many reasons. The jump in oil prices in the 1970s led to real estate bubbles in Texas and other energy states. The S&L crisis of the 1980s was largely caused by a doubling of government guarantees on deposits. The recent crisis might not have happened if the Fed hadn't kept interest rates artificially low, prompting investors to look for higher returns in sub-prime mortgages.

Risk Revealed in Home Prices

Even though a change in context can't always be seen for what it is, the risk itself often shows up as an unsustainable increase in home prices. This happens when the demand for homes - from just-hired oil workers, from speculators or from newly-qualified sub-prime buyers - increases faster than the supply.

It's easy to see in hind-sight when real estate markets were over-priced. It's easy to say afterwards that the home price increases were not sustainable. But can we see this beforehand, and therefore do something about it?

The steadiest anchor for home prices in the last 40 years has been income. Like home prices, income varies from locality to locality - and although the ratio of price to income in a California market might be different from the ratio in Iowa, the ratio in any local market is remarkably constant, changing only during those periods we're trying to identify: when prices are unsustainably high.

 

We calculate an Equilibrium Home Price for each of 316 markets in the US, based on the long-term ratio of local home price to income. We consider a market over-priced when the average local home price exceeds the Equilibrium Price by more than 20 percent. Seen this way, in real time, some markets in Florida, Arizona and California were already over-priced in 2004.

Combining Context with Traditional Risk

 

The context of risk doesn't directly translate into a mathematical formula of default (which is why it's so often ignored). Even though we may know there is a higher risk of default or of falling home values, we can't say exactly how much higher the risk is.

But we can use the context to take common sense management steps that reduce the risk.

The first step is to tighten underwriting standards. When business is brisk from strong demand, lenders easily get careless with their underwriting process. Just ensuring that no short-cuts are being taken is useful down the road.

1. We recommend that lenders review and tighten their underwriting process when the average home price in a local market exceeds the Equilibrium Price by more than 20 percent.

The next step is to reduce exposure by writing fewer high LTV loans or by requiring insurance on exposures above 80 percent LTV.

2. We recommend that lenders reduce their exposure down to 80 percent LTV when the average home price exceeds the Equilibrium Price by more than 40 percent.

The final step is to stop all exposure to new loans, either by not writing any new ones or by immediately reselling them.

3. We recommend that lenders stop their expose altogether when the average home price exceeds the Equilibrium Price by more than 60 percent.

This last is a rare occurrence but was apparent in many Florida and California markets by early 2006.