National Economic Outlook

Written By:
Ingo Winzer, President

Local Market Monitor

We usually believe that low interest rates are good for the economy and especially for real estate, but the fact that rock-bottom rates the last few years have done little to boost demand suggests the situation is more complex. An alternative scenario is that low interest rates lead to heavy borrowing from homeowners (cash-out refinancing, home equity loans, new homeowners) and a search for higher yields (sub-prime mortgages) from pension funds and companies with future obligations. In this scenario, cheap debt initially drives up demand (and therefore the price) for homes, but saddles homeowners with so much debt that they're eventually forced out of the market.

From 1998 to 2005, the 1 year ARM rate minus inflation steadily fell from 4 percent to 1 percent. Meanwhile, annual new home sales increased steadily from 900 thousand to 1300 thousand, home prices rose 65 percent, mortgage debt doubled by $5 TRILLION and home equity debt rose from almost nothing to $450 billion.

The economy keeps improving. Jobs in October were up 2 percent from last year. Notably, jobs in manufacturing were up 1.4 percent, spread among almost all categories except electronics. Jobs were up 1.8 percent in retail, 3.6 percent in business services, 2.1 percent in healthcare and 3 percent at restaurants. Especially encouraging is that jobs in transportation - a strong indicator of business activity - were up 3.5 percent. Overall, government jobs were virtually flat, but local government jobs increased. Unemployment fell to 5.8 percent.

National Economic Outlook - October 2014

Written By:
Ingo Winzer, President

Local Market Monitor

Quite aside from the $10 trillion home owners owe on their mortgages - an amount that doubled in the last 20 years - they owe more than $3 trillion in consumer debt, $10,000 for every man, woman and child in the US. This used to be mainly credit cards and car loans, but over half of it is now concentrated in two groups that are very important to real estate. Home owners owe $450 billion in home equity loans, and young adults owe $1.2 trillion in student loans (whew!). Is it any wonder that so many home owners and would-be new ones have to sit on the real estate side lines?

With many buyers unable to buy, it's pretty clear why home prices are below income levels in most local markets today and why new construction has added so little to the economy. What's worrisome is that this situation, especially for young adults, isn't going to change much in the near future.

In September, the number of jobs was 2.0 percent higher than a year ago - a sign of slow, continuing improvement. Jobs were up 4 percent in construction, 1.3 percent in manufacturing, 1.8 percent in retail, 3.8 percent in business services, 2 percent in healthcare, and 2.8 percent at restaurants.

Government jobs were flat, not only at the federal and state level, where political considerations weigh most heavily, but also at the local level where spending on education is necessary for long-term economic growth.

National Economic Outlook - September 2014

Written By:
Ingo Winzer, President

Local Market Monitor

If you take out the swings in inventory levels that bedevil the quarterly Gross Domestic Product figures, you find that the US economy has been growing at a 2% to 3% rate for the past several years; not bad, but also – and this is the point - not improving. We’d like to think that the economy is slowly getting better and that if we just wait long enough everything will be back to “normal”, but what if that’s not going to happen? It’s not difficult to imagine an economy based more on consumption and speculation and less on investment and production. In such a situation, will owning real estate be a luxury that fewer and fewer people can afford?

In August, jobs were up 1.8 percent over last year, including a 4 percent increase in construction, a 1.4 percent increase in manufacture, a 1.6 percent increase in retail, a 3.5 percent increase in business services, a 2 percent increase in healthcare, and a 2.8 percent increase at restaurants. Government, as usual, provided no new jobs.

The increase in manufacturing jobs is a small sign that factors other than labor costs are becoming more important to manufacturers, such as political stability, nearness to markets, and better quality control. A turn in this sector of the economy would have very good long-term consequences.

National Economic Outlook - August 2014

Written By:
Ingo Winzer, President

Local Market Monitor

The economy in general is doing well. Jobs are being created at the fastest rate in years, and the total number now exceeds the peak reached before the 2008 recession. Yet, unless you live in Texas, Colorado, North Dakota or one of the other energy regions, the real estate market has shown little improvement. Part of the problem is debt-related (too many homeowners still underwater), another is income-related (not enough well-paying jobs), but the result is that strong demand for real estate is still not here - an unusual disconnect from the overall economy.

The number of jobs in July was up 1.9 percent from last year. This included a 3.6 percent increase in construction jobs - still small but improving. Jobs were up 1.5 percent in manufacturing, 2 percent in retail trade, 3.5 percent in business services, 1.6 percent in healthcare, and 2.8 percent at restaurants.

Unemployment in July was 6.2 percent. As expected, the GDP results for the second quarter of 2014 completely reversed the poor showing in the first quarter.

National Economic Outlook - June 2014

National Economic Outlook - June 2014

Written By:
Ingo Winzer, President

Local Market Monitor

The majority of Americans live in places where home prices - even if they have increased lately - are still at least 10 percent lower than the peak they reached during the mid-2000s boom. These include New York, Los Angeles, Chicago, Atlanta, Washington DC, Seattle, Charlotte and Salt Lake City. Prices are higher only in San Francisco, Denver, and pretty much all of Texas.

The reason this is important is that large numbers of homeowners in those places hold mortgages that are still under water - they owe more than their home is worth - and therefore can't borrow against any home equity and can't either sell their home or buy a new one. They are essentially out of the real estate market and also can't spend any money. No wonder that home construction is still in a trough and that the economy is just sputtering along.

The latest GDP estimate for the fourth quarter of 2013 shows that consumers increased spending at a modest 2 percent annual rate but that investment in equipment, construction and inventories dropped just as much, leaving GDP down one percent because exports fell. (The government, as usual, made no contribution.)

Despite the optimistic pronouncements, the job situation in May was much the same as it has been for months, with jobs up 1.8 percent from last year. Jobs were up just 3 percent in construction, 1 percent in manufacturing, 2 percent in retail, 3.5 percent in business services, 3 percent at restaurants, and 1.5 percent in healthcare. Note that low-wage jobs make up most of the increase. The unemployment rate is still 6.3 percent.

National Economic Outlook - February 2014

Written By:
Ingo Winzer, President

Local Market Monitor

Estimates for GDP in the fourth quarter paint a positive picture, even though total growth was at a modest 2.4 percent annual rate after a 4.1 percent third quarter. Most encouraging is that personal spending was a good part of the growth. Last quarter, personal spending contributed 1.4 percent to GDP growth, this time it was 1.7 percent; this may not seem like a big difference but personal spending is 70 percent of the economy. For the economy to have sustained growth, consumers have to spend; if they keep up the good work in the next few quarters, the economy will shift into a higher gear.

A few other details from the GDP report. Cars were a very small part of personal spending; good, because car buying blocks out other spending. Inventories grew only a modest amount; good, because an economy that just builds stuff for inventory isn't going far. Exports were at the highest level in years (and imports were low - thank you shale oil); good, because it means more jobs in the US. Lower Federal government spending took a full 1 percent off GDP; due to the government shutdown in October?

A not-so-good GDP detail: residential investment was actually negative. This may be the most significant part of the report for the real estate market. The lack of new construction is mirrored in the jobs report for January, which showed a puny 3 percent increase in construction jobs in the past year. On the positive side, this means the economy is growing well even without the construction sector kicking in; on the negative side, there will not be enough new housing to prevent substantial home price increases in many markets in the next few years.

Ever-higher home prices were a short-term boon for the US economy in the mid-2000s, as homeowners spent their bulging equity, but a long-term disaster we're still dealing with. Recent price increases were largely connected with a scramble for foreclosed properties, a phenomenon with a short shelf-life and limited economic impact; a larger, longer bubble in prices because of housing shortages will produce a new recession within the decade.

National Economic Outlook - January 2014

Written By:
Ingo Winzer, President

Local Market Monitor

A big drop in the unemployment rate, to 6.7 percent, has raised expectations for faster economic growth. These days a rate of 5 percent might be considered "full employment" because the nature of the workforce has changed and many people choose not to have steady work, so we're about 2.8 million jobs short, which isn't a lot. After the last recession, the economy recovered 4.5 million jobs in just two years.

A stronger economy so far doesn't show up in the employment figures. The number of jobs in December was up 1.6 percent from last year, on a par with recent performance. Jobs were up 0.7 percent in manufacturing, 2.6 percent in retail, 3.4 percent in business services, 1.4 percent in healthcare, and 2.9 percent in restaurants. Jobs in government were flat.

Jobs in construction were up only 2 percent. This is where the economy so far has fallen short and where faster economic growth is likely to come from. During the building boom of 2005-07 a million "excess" construction jobs were created, so that level isn't our standard, but we're still down a million jobs from a "normal" amount of construction.