Bob's Economic Forecast
Tuesday I made the 45-minute trip into town to listen to a presentation by Robert Kleinhenz, who is the deputy chief economist for the California Association of Realtors. Bob lives in Sacramento so he is close to our local real estate market. He also has his PHD in economics from USC so even though employed by our trade association he has sufficient credentials to be credible.
Economists are good at telling us what we already know. Bob spent a good part of his presentations with charts and graphs, pointing out the real estate market is going through a contraction. Sales in our region have declined by 30 percent and may drop another 5 percent next year. Home prices have declined from their record highs last year and inventory is nearly twice what we are accustomed to dealing with. We all knew that stuff. But here are a few things in his presentation worth thinking about.
The cause of our declining real estate market is more psychological than based upon negative economic factors. Our real estate values did get a little out of reach for most but unlike past real estate recessions, there is no real economic problems to cause a decline in sales or home values.
I have lived through three other major real estate recessions. One in the 1970’s was the result of an oil shortage. In the 1980s I witnessed another real estate set- back when interest rates climbed to 15 percent. Then in the early 1990s the Clinton administration decided to curtail defense spending and closed 25 military installations in California. Three were in Sacramento County and our region lost 25,000 jobs and 50,000 people between 1991 and 1995.
This current downturn in the market is not the result of any poor underlying economic condition. Our economy is in the best shape it has been in years and our record highs in the stock market validates it. Our GDP is growing at a good rate of 3 to 4 percent. Employment gains are healthy. Unemployment is at record lows. Inflation is hardly an issue with the CPI running 2.5 percent. Interest rates are still historical good and real wages are increasing, so why is the market so sluggish?
Too many new homes is one reason. Builders overbuilt and in order to sell off their excess inventory started slashing prices and offering large incentives. Resale was forced to compete with new home sales, resulting in falling resale prices in areas that are competing with a large amount of new homes. Builders built 15,000 new homes in the region last year. They will not repeat that record.
Another reason for our recent slump is all the investors and flippers deserted the market. In California we buy investment property for appreciation not cash flow. So, when the appreciation stopped the investors bailed. This added lots of inventory to the already over-supply of new homes.
Since over-supply appears to be the culprit for the market’s sluggish performance and not any other basic negative economic conditions like jobs, inflation, higher interest rates, etc. we should pull out of this current phase within a year. We will probably hit bottom this winter and will start to see some signs of life this spring.
Bob’s housing forecast was upbeat. We are in a temporary pull back, resulting from too many new homes, skyrocketing home prices that could not be sustained and investors dumping their investments for more lucrative opportunities. The market will slowly improve next spring but it may be a long way off before we see twenty percent yearly appreciation. Since 1964 the yearly average appreciation rate on homes has been 8 percent, sometimes more, sometimes less.
Eight out of ten homebuyers who purchased a home in the last six months did so for lifestyle reasons and not for tax advantages or investments. Somewhere between 2000 and 2005 many buyers forgot about the basic reasons of owning a home. It’s about time we all got back to the more traditional reasons.
Economists are good at telling us what we already know. Bob spent a good part of his presentations with charts and graphs, pointing out the real estate market is going through a contraction. Sales in our region have declined by 30 percent and may drop another 5 percent next year. Home prices have declined from their record highs last year and inventory is nearly twice what we are accustomed to dealing with. We all knew that stuff. But here are a few things in his presentation worth thinking about.
The cause of our declining real estate market is more psychological than based upon negative economic factors. Our real estate values did get a little out of reach for most but unlike past real estate recessions, there is no real economic problems to cause a decline in sales or home values.
I have lived through three other major real estate recessions. One in the 1970’s was the result of an oil shortage. In the 1980s I witnessed another real estate set- back when interest rates climbed to 15 percent. Then in the early 1990s the Clinton administration decided to curtail defense spending and closed 25 military installations in California. Three were in Sacramento County and our region lost 25,000 jobs and 50,000 people between 1991 and 1995.
This current downturn in the market is not the result of any poor underlying economic condition. Our economy is in the best shape it has been in years and our record highs in the stock market validates it. Our GDP is growing at a good rate of 3 to 4 percent. Employment gains are healthy. Unemployment is at record lows. Inflation is hardly an issue with the CPI running 2.5 percent. Interest rates are still historical good and real wages are increasing, so why is the market so sluggish?
Too many new homes is one reason. Builders overbuilt and in order to sell off their excess inventory started slashing prices and offering large incentives. Resale was forced to compete with new home sales, resulting in falling resale prices in areas that are competing with a large amount of new homes. Builders built 15,000 new homes in the region last year. They will not repeat that record.
Another reason for our recent slump is all the investors and flippers deserted the market. In California we buy investment property for appreciation not cash flow. So, when the appreciation stopped the investors bailed. This added lots of inventory to the already over-supply of new homes.
Since over-supply appears to be the culprit for the market’s sluggish performance and not any other basic negative economic conditions like jobs, inflation, higher interest rates, etc. we should pull out of this current phase within a year. We will probably hit bottom this winter and will start to see some signs of life this spring.
Bob’s housing forecast was upbeat. We are in a temporary pull back, resulting from too many new homes, skyrocketing home prices that could not be sustained and investors dumping their investments for more lucrative opportunities. The market will slowly improve next spring but it may be a long way off before we see twenty percent yearly appreciation. Since 1964 the yearly average appreciation rate on homes has been 8 percent, sometimes more, sometimes less.
Eight out of ten homebuyers who purchased a home in the last six months did so for lifestyle reasons and not for tax advantages or investments. Somewhere between 2000 and 2005 many buyers forgot about the basic reasons of owning a home. It’s about time we all got back to the more traditional reasons.
posted by Ken Calhoon at 7:52 AM
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