Transcript Effects on real estate

The North Bay Economy:
Real Estate Markets and Outlook
August 27, 2009
Petaluma, CA
Robert Eyler, Ph.D.
Chair, Economics Department
Director, Center for Regional Economic Analysis
Sonoma State University
[email protected]
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The Agenda
• National and state situations affect our regional economy
– Banking of key importance now in facilitating a turnaround
– CA continued budget failures the current, major uncertainty
– Point of sale ordinances one of many possible ways governments will look
at real estate for revenue
• Economic outlook
– Recession continues but signs of a turnaround exist
– Long-term outlook still strong in North Bay
• Need to seize innovative ideas
• Real estate markets
– Regional economic development dictates housing markets
2
International and Domestic
• Asia on the rebound
– Productivity continues as exports slowly turnaround
– Will Asian and European wealth provide demand for real
estate?
• Fiscal stimulus starting to help
– Job creation the aim (including saving jobs)
• Stimulating innovation not consumption
• Monetary policy at a natural endpoint
– Why have banks not started lending again?
– Expect regulation will encompass all lending and slow the
speed of real estate transactions
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The Important Role of Banking
• Credit is a large part of economic growth models
– Investment from savings begets economic growth
– Lending should be for investment, not consumption
• Expected risk remains high for banks in current
market
– Following charts show bank nervousness
• Real estate markets grow more slowly in short-term
– New regulatory environment contributing to slow
movement
– Banking has been very risk averse since Summer 2008
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Billions of Dollars
Excess Reserves at U.S. Banks (Loanable Funds Not Lent), 2008$
1970-1999
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Month
Source: Federal Reserve Board
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Billions of Dollars
Excess Reserves at U.S. Banks (Loanable Funds Not Lent), 2008$
2000 - 2008
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12
10
8
6
4
2
0
Month
Source: Federal Reserve Board
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Excess Reserves at U.S. Banks (Loanable Funds Not Lent), 2008$
Jan 2008 - Aug 2009
900
800
700
Billions of $
600
500
400
300
200
100
0
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug08
08
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Month
Source: Federal Reserve Board
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Excess Reserves at U.S. Banks (Loanable Funds Not Lent), 2008$
Jan 1970 - Aug 2009
1100
Billions of $
800
500
200
-100
Jan-70 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
Month
Source: Federal Reserve Board
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Long-Term Effects of Policies
• Inflation threat is real
– Current “monetary” package is fueled by a combination of debt and
money printing
– Speed and magnitude the only questions
• Permanent cuts have larger short-term effects than temporary
– Temporary cuts or spending provide better long-term signal of discipline
– Expect interest rates to rise in late 2009 or early 2010
• Defined benefits packages the next major budget issue
everywhere
• Outlook for 2010 better than 2009 if nothing unknown changes
the economic outlook
– Not necessarily for state and local budgets which lag national economy
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California
• Model of public finance in California broken
– Many are pointing at Prop 13 as the culprit
• 2/3 vote on taxes
• Lack of movement on property taxes
– Deficit rising every day: now $60 billion by 2010??!
– Federal spending has filled void partially
• $5 billion of Federal Stimulus used already to plug the hole
– Other issues
• Pension systems to be stretched soon: largest defined packages
• School spending in CA now 50th in nation ($18K per pupil)
– Issue now and in the future for California
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What may happen
• Budget gap closed through borrowing
– Borrow, if and when possible
• May 19 showed CA voters do not want more taxes
– What about Prop 13?
– Need a change to 2/3 vote and term limits?
• Effects on real estate
– Higher tax rates slow down transactions
• Coming in every way possible, so prepare
– Commercial real estate threatened by changes in
corporate and worker’s compensation taxes just for
starters
– Glacial economic movement upward slows progress
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Signs of Hope Rather Than Apocalypse
• Link between S&P 500 and labor markets
– Historically, S&P 500 index and national unemployment linked
– When S&P 500 hits bottom, 5 – 6 months later is when unemployment
peaks on average since 1948
– S&P 500 trough was on March 9, 2009: about 47% growth since
• Federal stimulus and stable interest rates remain as
incentives: need to be seized
• Asia rebound means export opportunities rising
• Auto and home sales rising also
• Must have innovation take place
– Cannot rely on consumer to pull economy
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1800
S&P 500 Monthly Close, Jan 1990 – July 2009
Vertical lines represent bottom of cycle
1600
1400
S&P 500 Index
1200
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400
200
0
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan90
91
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00
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Date
Source: Economagic.com
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US and CA Monthly Unemployment, Jan 1990 – Jul 2009
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US
CA
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Unemployment Rate (%)
10
8
6
4
2
0
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan90
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Source: California EDD
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Source: California EDD
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Unemployment (%)
Unemployment for Marin, Napa and Sonoma Counties, Jan 90 – Jul 09
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Residential Real Estate
• Unemployment puts both supply and demand pressures
on market
– Supply: as unemployment rises, number of units rise
– Demand: as unemployment rises, fear over lost jobs reduces
demand
• Interdependence: 96.6% correlation between Sonoma
and Marin County median home price since 1995
– Similar across North Bay: which county is the driver?
• Two big questions the market has yet to answer
– Was the old pricing correct?
– Is the current pricing correct?
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Residential (cont.)
• Foundations
– Is demand stable?
• Tourism and retirement purchases, what %?
– What are the supply conditions?
• Those that remain in their homes will reap long-term gains.
– Lake and Mendocino Counties likely to be longer-term growth areas
• Commercial space
– Demand should remain, worse case as a movement from Bay Area
otherwise.
– Supply naturally to contract, especially as a reaction to recession
• Financial literacy a big deal going forward in residential real
estate
• Following graph compares counties and their growth of real
estate prices since 2002.
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Index, Jan 2002 = 100
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Median Home Prices Indices: Sonoma, Marin and Napa counties,
Jan 2002 – June 2009, Jan 2002 = 100
200
Source: CAR.org
Sonoma
Napa
Marin
150
100
50
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Month
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Commercial Real Estate
• Construction of new commercial property likely to be
project-specific rather than anticipatory
– Likely to see a foreclosure wave in commercial by 2010
– Still need to fill them and keep them occupied
• Rents falling for some time now, market reaction
– Were rents too high to start?
– Was commercial overbuilt locally?
• Demography shifting toward locally-serving companies
• Economic paradigm shift: auto dealers an example
• Economic Development a large part of real estate
forecast for commercial
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Economic Development
• Economic development must link commercial real estate to
business opportunities
– Need to have a regional development plan
– Need to think beyond city and county borders
• Three “E’s” the current mantra
– Economic Vitality
– Social Equity
– Environmental Balance
• How economic development takes place affects real estate
markets: get involved!
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Example
• A new business is wooed to Novato
– Occupies commercial space and creates jobs
– New jobs mean new demand for residential real estate
• New business may be asked to engage in community project
– Non-profit may occupy commercial space and expand as a result
• Environmental regulations provide two prongs of opportunity
– AB 811 to retrofit homes for energy and water efficiency
• Keeps contractors locally before next building or renovation boom
– New businesses engage in innovative solutions
• More jobs = commercial space and residential demand
• Which leads to economic vitality: the wheel rolls on
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Economic Outlook
• Recession for through 2009 for California
– Bottom to hit soon: thud not heard for a few months
•
•
•
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Indicators show economy is slowly turning around
CA budget throws uncertainty into game
Residential real estate markets picking up momentum
Commercial likely to continue a rough patch
• Housing should be seen as a follower not leader
– Exposure of North Bay to real estate markets is a microcosm of local
economy
• Services and population-serving first
• Recognize regional connections
– All counties are going to scramble for firms
– Housing markets should react not drive
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