National Economic Outlook - December 2015

Written By:
Ingo Winzer, President

Local Market Monitor

The link between income and home prices is so strong that it only breaks down in special circumstances. The pre-recession boom was one, the recession bust was another, and the local boomlets in foreclosed properties were a third. Now that that dust has settled, we can foresee different futures for some groups of markets, according to the balance between income and home prices.

Some markets are still recovering; prices have risen rapidly but are still below the income level. This group includes many markets in Florida and California. Once prices are back in balance with income - in the next couple of years - expect more-modest increases.

In some markets, prices are in balance with income and are surging because of good economic growth. This group includes markets in Colorado, Texas and the Northwest, but also some in California (Bay Area) and Florida (Miami area). These markets are growing faster than builders can keep up, so expect home prices to rise for years - possibly into another boom.

Some markets, unfortunately, are stagnating; home prices are well below where income says they should be, but are not recovering, because economic growth is poor. This group includes many smaller markets throughout the country that depend on a few large employers, but also Hartford, Camden, Tucson. If local economies are not doing better at this stage of the economic recovery, expect flat home prices for years.

As in previous months, there were 1.9 percent more jobs in the US in November than a year ago. The surge of growth in manufacturing earlier in the year has abated, jobs were up just 0.3 percent. Retail jobs were up 1.8 percent, business services jobs up 3.2 percent, healthcare jobs up 3.2 percent, and restaurant jobs up 3.5 percent. Government jobs were up slightly, 0.4 percent, mainly at the state level. Unemployment remained at 5 percent.

National Economic Outlook - November 2015

Written By:
Ingo Winzer, President

Local Market Monitor

At the height of the building boom before the recession of 2008, 3.5 million Americans were employed building homes - and that's not counting maybe a million illegal workers. During the recession the total dropped to 2 million and now it's 2.5 million workers. At the current rate of growth - about 4 percent - 100,000 home-building jobs will be added in the next year. During the boom, the maximum annual addition was 150,000 jobs.

At a minimum, the US needs 1.5 million new homes a year - but the current level of production is just 1 million. Because home builders can't add jobs overnight, the US will very soon be facing a shortage of housing that will last years. Since 2008, the real estate market has been dominated by falling home prices and speculation in foreclosed properties. That period is over. The next five years will see both home prices and rents rise faster than incomes.

The economy added 2.7 million jobs in the past year, a 1.9 percent growth rate. In October, jobs were up a modest 0.5 percent in manufacturing, 2 percent in retail trade, 3.3 percent in business services, 3.3 percent in healthcare, and 3.4 percent at restaurants. Government jobs were virtually flat. Unemployment remained at 5 percent.

National Economic Outlook - October 2015

National Economic Outlook - October 2015

Written By:
Ingo Winzer, President

Local Market Monitor

One of the main drivers of the economy in the past decade has been the healthcare sector, which now employs one in every eight workers. This is partly because of advances in medical care, partly because of the aging of baby boomers, and partly because more people have health insurance. In many communities where manufacturing was once dominant, healthcare is now the anchor of the economy.

Healthcare jobs require more skill and are better paid than in the past, with hourly wages of $24 that equal those in business services and finance, and are higher than those in manufacturing. Local markets with a growing healthcare sector will have steadily higher demand for homes and apartments.

The number of jobs in September was up 1.9 percent from last year, a slight slowing from previous months. The main culprit was manufacturing, where jobs increased just 0.7 percent - compared to 1.6 percent earlier this year. Jobs were higher by 2 percent in retail, 3.1 percent in business services, 3.1 percent in healthcare, and 3.2 percent at restaurants. Government jobs increased 0.8 percent, mainly at the state and local levels.

The slowdown in manufacturing was concentrated in metal products and machinery, probably linked to lower worldwide demand for mining and construction machinery. Jobs in the auto and aircraft manufacturing sector were up a solid 2.7 percent.

National Economic Outlook - September 2015

Written By:
Ingo Winzer, President

Local Market Monitor

Sub-prime mortgage lending on a massive scale produced a run-up in home prices, then a gigantic crash, then rebound speculation in foreclosed properties. Now, ten years after the start of this cycle, we seem to be near it's end. The latest home price data show just a residual flush in those areas most heavily infected by the sub-prime/foreclosure disease - Arizona, California, Florida, Nevada, and parts of Oregon and Idaho.

We could call it the Phoenix Syndrome because of the extremes in this major market - home prices up 40 percent in 2005, down 22 percent in 2008, up 19 percent in 2013, and now settled at 5 percent. The name aptly symbolizes the cycles of opportunity and destruction that characterize our real estate markets. Like it or not, in a country where people and jobs are always moving - and where government policy intrudes - the value of immovable assets goes up and down.

One aspect of this syndrome - which for real economists is just setting prices at the margin - is that the actual value of a typical home is often unknown. If foreclosed homes in Phoenix are worth 19 percent more, does that mean ALL homes in Phoenix are worth 19 percent more? Many of the difficulties in home lending and home construction are due to our ignorance of fundamental value.

In August - continuing the trend of the last six months - the number of jobs was up 2.1 percent over last year. Jobs were up 1 percent in manufacturing, 2 percent in retail trade, 3.4 percent in business services, 3 percent in healthcare, 3.5 percent at restaurants and 0.6 percent in government. The unemployment rate fell to 5.1 percent.

Note that jobs in transportation - a good indicator of business activity - were up a good 3 percent. On the other hand, the 3 percent increase in construction jobs is fairly modest - just a year ago it was 5 percent.

National Economic Outlook - August 2015

Written By:
Ingo Winzer, President

Local Market Monitor

One of the bright spots of the economy has been renewed growth in the manufacturing sector. This is partly due to greater automation - which makes labor a smaller part of overall costs - partly to political considerations, and partly to the lower cost of energy. Production has been up at a moderate rate across the board, in consumer products, business equipment, materials, and energy; only the Defense and paper industries are lagging.

Twenty years ago the US had 17 million manufacturing jobs, now just 12 million - and they now pay less than jobs in healthcare, go figure - but the economic benefits of MAKING THINGS extend well beyond the production floor. An economy with a growing manufacturing sector has much better prospects than one that just relies on services.

In July, jobs were up 2.1 percent over last year. They increased 3.5 percent in construction, 1.2 percent in manufacturing, 2.0 percent in retail sales, 3.0 percent in transport, 3.6 percent in business services, 3.0 percent in healthcare, and 3.5 percent at restaurants. Unemployment stayed at 5.3 percent.

National Economic Outlook - July 2015

Written By:
Ingo Winzer, President

Local Market Monitor

Real estate hasn't done much the recovery so far; the dysfunctional aspects that contributed heavily to the recession are still getting sorted out. But it looks like a more "normal" real estate situation is just around the corner.

The easiest way to see this is to look at new home sales - the statistics aren't contaminated by foreclosures. In normal times, around 800,000 new homes are sold in the US every year. During the recession, that level dropped to 300,000 but now it's up to 500,000. Each new home built directly translates into 4 full-time jobs, so the likely increase to 600,000 new homes next year will create 400,000 new jobs.

The economy in June had 3 million more jobs than a year ago, a 2.1 percent increase. Jobs were up 1.3 percent in manufacturing, 2.0 percent in retail, 3.5 percent in business services, 3.0 percent in healthcare, and 3.3 percent at restaurants. Jobs in finance increased 2 percent, but mainly because of additions at insurance companies. The unemployment rate fell to 5.3 percent

National Economic Outlook - June 2015

Written By:
Ingo Winzer, President

Local Market Monitor

Good as government statisticians are, they can't make adjustments for the weather. That's what they'd like to do with the Gross Domestic Product numbers from the first quarter of this year, which say the economy was down 0.7 percent. It's clear that nasty weather was to blame rather than some fundamental deterioration. The negatives were from exports, construction, and people not buying big-ticket items - just what you might expect if ports are frozen and snow drifts are blocking your front door.

Statisticians would like to make adjustments to the various home prices indexes, which not so long ago were telling us that prices were up 20 percent in Phoenix and Sacramento, for example - 26 percent in Las Vegas. Now that the booms in those markets have subsided, it's clear that we were seeing speculation in foreclosed properties instead of a real rise in home values. Although real estate is America's biggest industry and largest personal asset, our ability to measure and understand it is pitiful - compared, say, to our knowledge of employment.

(I could go on and on about this - how the financial crash and recession were entirely due to our ignorance about real estate...)

The employment numbers show an economy that is doing very well, even if the GDP numbers don't. Jobs in May were up 2.2 percent from last year - in line with results from recent months - and unemployment held steady at 5.5 percent. Jobs were up 1.4 percent in manufacturing, 2.2 percent in retail trade, 3.6 percent in business services, 2.8 percent in healthcare, and 3.4 percent at restaurants. As always, these days, government jobs were flat.

Jobs in construction were up 5 percent and jobs in furniture manufacture were up 5 percent. These are small potatoes so far, just hinting at stronger demand, but a reviving home construction industry would be a powerful and long-lasting support for the economy.

National Economic Outlook - May 2015

Written By:
Ingo Winzer, President

Local Market Monitor

Now that the economy is growing at a rate that seemed impossibly high a couple of years ago, we may wonder if this is just a rally with short legs - maybe goosed by short-term events like cheaper energy? - or evidence of structural growth that has fundamentally changed for the better. After all, the apparent strength of the economy just before the recession was fueled by consumers fecklessly spending money they didn't have - why should we be smarter this time around?

The job numbers suggest that our economy is adapting to new conditions and that we can therefore expect the current level of growth to continue for a while - until some unexpected shock hits the system, as it always does. The bulk of the 8 million new jobs added to the economy in the past 3 years have been in fields that aren't very susceptible to energy shocks or stupid government policies or foreign markets or financial chicanery: business services, retail, and healthcare. This is quite a change from an American economy that used to depend on manufacturing, construction, and government spending. Part of the change is just aging baby-boomers - but they'll keep aging for a while.

The number of jobs in April was up 2.2 percent from last year, while unemployment was 5.4 percent. Much like the situation in previous months, jobs were up 5 percent in construction, 1.6 percent in manufacturing, 2 percent in retail, 3.6 percent in business services, 2.7 percent in healthcare, and 3.7 percent at restaurants. Government jobs were flat.   

National Economic Outlook - April 2015

Written By:
Ingo Winzer, President

Local Market Monitor

The Gross Domestic Product is no longer a highly reliable measure of what's going on with the national economy. In the fourth quarter of 2014 it was up 2.2 percent - but in the third quarter it was up 5.0 percent and in the first quarter it was down 2.1 percent. So, is the economy doing better or worse? At another level, though, GDP can show us how things are different now than they used to be - which can help us foresee future trends.

Ten years ago, in 2004, some parts of GDP looked very much like they do right now. Personal spending contributed 2.7 percent to GDP - versus 3.0 percent in the fourth quarter of 2014, and net imports then were a minus .59 percent - versus a minus 1.03 percent now. The big differences are in government spending, which contributed .37 percent then - against a minus .35 percent now, and in private investment, which contributed 2.0 percent to GDP then but has averaged only .85 percent over the last three years. Between the two of them, government spending and private investment  consistently contribute almost 2 percent less to GDP then they used to.

The number of jobs in March was up 2.3 percent from last year, while unemployment stayed at 5.5 percent. Jobs were up 5 percent in construction - not yet a big deal but a dawning hope that the sector can be resurrected, 1.6 percent in manufacturing, 2.1 percent in retail, 3.5 percent in business services, 2.7 percent in healthcare, and 4.0 percent at restaurants. As is now the new normal, job growth in government was flat.

The GDP data show that healthcare spending was up sharply in the fourth quarter - combined with the recent growth in healthcare jobs this looks like a consequence of the expansion of healthcare insurance. Whether this is a permanent boost to the economy or just a temporary surge remains to be seen. 

National Economic Outlook - March 2015

Written By:
Ingo Winzer, President

Local Market Monitor

In the long run, the economy and the real estate market are intertwined. In the short run that's not always true. Since the end of the recession - since 2009 - the economy has straggled along without any help from the real estate market (or the government, for that matter). There's been a fair amount of real estate buying, but mainly by investors making a play for the millions of foreclosed properties. Home construction - the kind of real estate transaction that creates jobs - has been stuck in first gear. Setting aside recent years, the level of construction in 2014 was the lowest since 1990 - when the country was in a recession.

Surprisingly, the economy is now doing well without the stimulus of construction. This seems partly due to the new healthcare law - more insured people equals more healthcare, which equals more healthcare jobs - and partly to the end of the off-shoring of manufacturing jobs. From 1990 to 2010, 6 million manufacturing jobs were eliminated in the US, but since then almost a million have been added back.

This reordering of the economy feeds into a reordering of the real estate market - less demand in the middle but more at both the top and the bottom. More demand for higher-end homes and more demand for rentals and lower-cost townhouses and condos.

The number of jobs in February was up 2.4 percent from last year, while unemployment fell to 5.5 percent. Jobs were up 1.8 percent in manufacturing - mainly for durable goods like machinery, cars and transport equipment; significantly, the number of jobs in the off-shore-endangered textile industry held constant. Jobs were up 2.1 percent in retail, 4.5 percent in transportation - a strong marker of economic activity - 3.6 percent in business services, 2.5 percent in healthcare, and 4.2 percent at restaurants. As usual, the government added nothing. 

National Economic Outlook- February 2015

Written By:
Ingo Winzer, President

Local Market Monitor

The economy has picked up steam in recent months. In January, the number of jobs was 2.4 percent higher than last year, the strongest growth rate of the last decade. Does this mean that real estate will be following right behind? It's been a very modest recovery so far - for the economy in general and real estate in particular, with demand in many markets driven by speculation in foreclosed properties, and new construction largely limited to apartments and high-end homes. Bankers have survived with refinancing’s but most of the juice has been squeezed out of that orange; bankers and builders both need more young couples who want a single-family home.

Despite the improving economy, they may not find as many as they'd like. Not only are young people more inclined to rent apartments in city centers for social reasons, they also carry a high level of student debt that puts a home mortgage out of reach until they're older. And there are fewer of the older ones: the number of people aged 35 to 44 decreased from 43 million in 2005, to 41 million in 2013.

Although a portion of the real estate market will always consist of regular mortgages and single-family homes on quarter-acre lots, it's easy to imagine more affordable townhouse construction that can double as apartments, and mortgages that have lease-to-own features similar to car contracts.

The strong economic performance in January was largely due to increases in manufacturing (jobs up 1.9 percent), retail (2.0 percent), business services (3.9 percent), healthcare (2.6 percent), and restaurants (3.9 percent). Note that many of the new jobs have fairly modest pay. The recent increase in healthcare jobs probably follows directly from the larger number of people with health insurance, but is almost certain to have legs because of the rapid increase in the older population; in many local markets, healthcare is THE growth industry.

National Economic Outlook - 2015 Preview

Written By:
Ingo Winzer, President

Local Market Monitor

Despite low interest rates, low inflation, and an economy that has steadily expanded, new and existing home sales - and therefore mortgage and home equity lending - have languished. Part of the reason is a high level of consumer debt that keeps many potential buyers out of the market; another is the changing make-up of the US population, with fewer people in the first-home age range of 34 to 45. And still another is the bifurcation of income, with recent gains going largely to people who already have a high income - and a house. These things won't change rapidly.

Much of the home sales activity in recent years involved speculation in foreclosed properties, especially in markets in Florida, California and Arizona, and in Las Vegas, Reno and Detroit. Foreclosure speculation during otherwise thin demand has distorted our knowledge of the true value of an average home in many markets.

As usual, some parts of the country have fared better than others. Sub-prime foreclosures have made things worse in Georgia, Alabama, Ohio and Michigan, where local economies were already in poor shape, while new energy jobs have boosted real estate in Texas, Colorado and the shale-oil towns of North Dakota, Montana and Wyoming.

Expect much of the same in 2015. Slow demand for mortgages and home equity loans. Tepid construction, with more apartments. Low new home sales, with a tilt toward more-expensive ones. Flat or even lower existing home sales in markets where foreclosed properties have been hot.

Strong economies and real estate markets in Texas, Colorado, Utah, Oregon. Renewed demand in Florida and Arizona. Ever higher prices in San Francisco, Seattle and LA. Modest economic growth - and modest real estate markets - in the Northeast, South and Midwest.