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. 

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.