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. 

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.